The Effect of Macroeconomic Variables on the Level of Non-performing Loans in Saccos in Kenya

Abstract

The goal of study was to determine the impact of macro-economic components on levels of NPLs in SACCO sector in Kenya. Moral hazard theory together with the asymmetric information theory informed the study. This research work used a descriptive design that gave the examiner the ability to designate the various variables being evaluated. Aggregate data was acquired for the entire SACCO sector. Information on unemployment, income per capita and was retrieved from KNBS while the interest rates over the period of interest were retrieved from the Sacco Societies Regulatory Authority. Exchange rate data were gathered from reports by the Central bank of Kenya. SPSS version 20 was employed in the analysis of data and the results were presented using percentages, frequencies, and tables. A multiple regression model assisted in describing the effect of macroeconomic variables on levels of NPLs in the SACCO sector in Kenya. The researcher revealed that an increase in interest rate while holding all the other factors constant would result in a decrease in non-performing loans of SACCOs. Further, it was noted that unemployment rate had significance and positive effect on non-performing loan of SACCOs. Findings from regression model also uncovered that that Exchange Rate had a positive significant influence on non-performing loans of SACCOs hence a unit increase in Exchange Rate while holding all the other factors constant would result into an increase on non-performing loans of SACCOs. A unit increase on Income Per Capita while holding all other factors constant would cause an increase in nonperforming loan of SACCOs. The study recommend that management in SACCOs should consider employment status of their customers as high rate of employment would result to high rate of salary which empowers customer to honor their obligation to pay back their loan hence reduces occurrence of nonperforming Loan as, without salary, loans could not be paid and therefore when unemployment rate is high, NPLs increase. The study recommends the government to ensure a stable economy and institute policies to ensure that the economy is growing to reduce non-performing loans of SACCOs. This study furnishes SACCOs with critical information that can empower credit managers to conduct risk assessment more effectively and with prudence. It is also meant to spur delight in further research on risk management. This study furnishes SACCOs with critical information that can empower credit managers to conduct risk assessment more effectively and with prudence. It is also meant to spur interest in further research on risk management.