Effect of interest rates on non-performing loans in Commercial Banks In Kenya
Abstract
Lending money is the main traditional function of commercial banks, and this aspect of
banking remains to date. However, loan defaults among commercials banks remain high
leading to financial distress of the banks even eventual collapse. Interest rate has an
inherent implicit cost on the credit issued by banks with antecedent implication on loan
defaults. Thus, the study sought to establish the impact of interest rates on nonperforming
loans in commercial banks in Kenya. This study adopted a descriptive
research design targeting all the 43 licensed commercial banks in Kenya. Secondary data
was collected on the interest rate charged by the banks, total loan and advances, total
non-performing loans, total assets, total risk weighted assets, noninterest expense, total
revenue for five-year period (2009 – 2013). The data collected was analyzed using both
descriptive and inferential statistics from multiple linear regression analysis using the
ordinary least square method. The findings were presented in tables and figures. The
study’s findings established significant, negative and good linear relationships between
banks’ NPLs and interest rate; interest rate spread and total assets. Significant, positive
and good linear relationships between banks’ NPLs and cost income ratio; and, capital
adequacy were also adduced. The study concludes that there is a strong relationship
between financial performance of commercial banks with interest rate. The study
recommended that there is need for banks to apply efficient and effective credit risk
management that will ensure that loans are matched with ability to repay and minimize
on their interest rate spread and other incidental costs so as to reduce loan default
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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