The Relationship Between Select Macroeconomic Variables and Loan Default Rate in Kenya

Abstract

Rising non-performing loans (NPLs) has been a concern for the banking industry in Kenya. This study therefore examined the relationship between select macroeconomic variables and the loan default rate among commercial banks in Kenya. The macroeconomic variables studied were inflation rate, lending interest rate, exchange rate of the US dollar to the Kenya Shilling and public debt as a percentage of the Gross Domestic Product (GDP). The loan default rate was represented by the net non-performing loans as a percentage of gross loans and advances. Secondary data extracted from the Central Bank of Kenya (CBK) monthly reviews for the period 2006-2013 was analyzed using Stata V14.1. A descriptive research design was adopted and summary statistics presented in tables. The study used an Ordinary Least Squares (OLS) model with Newey-West standard errors to estimate the model parameters. Public debt was the only independent variable that had a positive relationship with the loan default rate. Inflation, lending interest rate and the exchange rate were found to be negatively correlated with the dependent variable. Using p values, it was established that lending interest rate and the exchange rate were significant while inflation and public debt were not significant in the regression model.