The relationship between macroeconomic factors and non-performing loans in mortage firms in Kenya

Abstract

It is argued that the non-performing loans are one of the major causes of the economic stagnation problems and the current study sought to determine relationship between non-performing loans and macroeconomic factors in mortgage banks in Kenya. The general objective of the study is to identify the major macroeconomic causes of nonperforming loans in the mortgage institutions in Kenya. Specifically, it is aimed at determining the trend of incidence of NPLs in mortgage institutions and identifying factors accounting for the incidence of non-performing loans. The research design was selected as it helps in establishing the relationship between group borrowing and non performing loan in mortgage firms in Kenya. The population of this study was all 36 mortgage firms including banks, corporation and government ministry of housing. The study adopted a census survey where the entire 36 mortgage provider Institutions. The study used secondary data information that was obtained from articles, books, newspapers, internet and magazines. The study collected for a period of four years from 2010 to 2013. Data was analyzed through description statistics, means and standard deviations to determine the extent to which macroeconomic factors influence level of nonperforming loans in mortgage institutions. Further inferential statistics regression analysis was done to establish whether there exists a significant relationship between macroeconomic factors and non performing loans in mortgage institutions. The study concluded that GDP growth rate, high rate of unemployment, high rate of real interest rate, loan losses reserve ratio, significantly led to occurrence of Non Performing Loans. The study concluded that there existed significance strong and positive correlation between unemployment, real Interest rates in the economy contribute to Non-Performing loans in mortgage firms in Kenya. The study concluded that rate of unemployment would lead to a significant positive increase in Non Performing Loan as without salary, Mortgage loan could not be paid and therefore when unemployment rate is high, NPLs increase. The study recommends that management in mortgage sectors should carefully study the growth rate of the economy when determining their mortgage loan. The study recommend that management in mortgage sectors should consider employment status of their customers as high rate of employment would results to high rate of salary which empowers customer to honor their obligation to pay for their mortgage loan and reduces occurrence of Non Performing Loan as without salary, Mortgage loan could not be paid and therefore when unemployment rate is high, NPLs increase