The Effects of Non-performing Loans on Operational Efficiency of Commercial Banks in Kenya

Abstract

Nonperforming loans are considered as one of the major pain points for commercial banks loan assets portfolio. They have a cumulative effect on the total earnings of the banks. This leads to reduction of income and consequently effect on liquidity. Liquidity problems lead to working capital problems which in turn affects operations of the firms. The objective of this research was to study and investigate the effects of non-performing loans on operational efficiency of the Kenyan commercial banks. The basic questions that guided the study were; What are the major causes of NPLs in Kenyan banks, and To what extent do nonperforming loans affect operational efficiency of commercial banks in Kenya The research adopted an investigative and exploratory design that sought to analyse and correlate the effects of non-performing loans to the daily operational efficiency of Commercial Banks in Kenya. Secondary data from financial statements of 43 commercial banks and the central bank analysis was used to analyse and come up with conclusions and recommendations. Regression analysis was used to correlate and analyse the data. The findings from analysis show that there is a negative relationship between operational efficiency and NPLs for commercial banks in the country. The major recommendation was that, banks should employ appropriate measures to reduce levels of NPLs and in turn will reap from reduced operational inefficiencies. This study did however not conclusively research on the effects of NPLs on operational efficiency of commercial banks and Kenya, and therefore suggest for further research to be done in the area, to exhaustively relate the effects.