The effect of non performing loans on liquidity risk of commercial banks in Kenya
Liquidity risk is considered as one of the serious concern and challenge for the modern era banks. A bank having good asset quality, strong earnings and sufficient capital may fail if it is not maintaining adequate liquidity. Towards this end, the research sought to establish the effect of non-performing loans on liquidity risk of commercial banks in Kenya. The study was of value to various commercial banks in Kenya. This area of study will add to the pool of knowledge on the under researched area of the Non-performing loans in the banking sector. The literature review provided the reader with an explanation of the theoretical rationale of the problem being studied as well as what research has already been done and how the findings relate to the problem at hand. Research methodology showed the data collection, analysis and presentation. The study adopted correlation research design where data was retrieved from the balance sheets, income statements and notes of 43 Kenyan banks during 2009-2013. Multiple regressions was applied to assess the effect of Non-performing Loans on liquidity risk of commercial banks in Kenya. The regression model treated liquidity risk as the dependent variable while the independent variables were non-performing loans, capital adequacy, Size of the bank and loan growth. The findings of the study show that non-performing loans has an effect on liquidity risk among commercial banks in Kenya when banks with large capital had higher level of non-performing loans. Capital adequacy was indicated to affect liquidity of commercial banks when banks with large capital had little exposure to negative liquidity risk. Loan growth was indicated to affect the level of non-performing loans as commercial banks with higher loans growth had higher level of nonperforming loans which exposed them to liquidity risks. Size of the bank was indicated to affect on non-performing loans when large banks led high level of loans which exposes them to liquidity risk. The study concluded that capital adequacy, nonperforming loans and loans growth was found to have the most significant negative influence on liquidity risk and size of the bank had the least positive effect on Liquidity risk. The study recommended that banks should establish the required level of non-performing loans, capital adequacy and loan book size which will help in reducing the liquidity risk. Commercial banks should have a mechanism of identifying loan defaulters and take the necessary action against them. It is recommended that banks increase their customer deposit base through making the product accessible to more customers especially the low income earners who have been neglected for a long time by the mainstream banks.