Effect of Change in Loan Loss Provisioning Policy on the Financial Performance of Commercial Banks in Kenya

Abstract

The objective of the research was to establish the effect of change in provisioning policy to the financial performance of commercial banks in Kenya. This study also sought to establish how the control variables; asset quality, capital adequacy and management quality affect the financial performance of commercial banks in Kenya. Secondary data was extracted from audited financial statements of banks for the period 2014 to 2018. Descriptive statistics were used to compute the means, standard deviations, skewness as well as kurtosis. The correlation between change in loan loss provisioning and the financial performance of banks was tested using inferential statistics like correlation and regression analysis. All variables recorded Variance Inflation Factor (“VIF”) statistics which were less than 3 indicating absence of multicollinearity between the variables. Further, the data collected was distributed normally evidenced by Kolmogorov-Smirnov and Shapiro-Wilk statistics whose p-values were ≥ 0.05. It was established that a very strong relationship (R=0.844) exists between the financial performance of banks and loan loss provisioning. Loan loss provisioning when moderated against asset quality, capital adequacy and management quality influence 70.5% of the total variability in banks’ the financial performance as measured by the R-square value of 0.705. This implies that 29.5% of the commercial banks’ the financial performance cannot be explained by loan loss provisioning and the control variables. The research concludes that a very strong relationship (R= 0.844) exists between the financial performance of commercial banks and loan loss provisioning among banks in Kenya. The implication is that recognizing loan loss as per IFRS 9 leads to better financial performance by reducing loan losses. The research also concludes that loan loss provisioning under control of asset quality, capital adequacy and management quality influence 70.5% of the total variability in commercial bank the financial performance. This implies that 29.5% of the commercial banks’ the financial performance cannot be explained by loan loss provisioning and the control variables. The research concludes that loan loss provisioning ratio, asset quality, capital adequacy and management efficiency influence commercial banks the financial performance positively. This effect is also statistically significant. The research established that loan loss provisioning as per IFRS 9 influences commercial banks the financial performance of positively. The research recommends that in order to avoid loan losses, financial institutions should implement IFRS 9 (ECLs) in totality. However, further research should be conducted to establish the factors influencing commercial banks’ the financial performance in Kenya.