Effects of selected bank specific factors on non performing loans amongst commercial banks in Kenya
Non-performing loans refer to loans which for a relatively long period of time do not generate income. Controlling non-performing is very important for both the performance of an individual bank and the economy’s financial environment. Over the past decade, the credit quality of loan portfolios across most countries in the world remained relatively stable until the financial crises hit the global economy. Studies conflict on the causes of the levels of NPLs as authors point to macro economic factors, bank specific factor and customer characteristics. With these conflicts in mind, the current study sought to determine the effects of firm specific variables on non performing loans in Kenya. This study designed as across sectional survey collected secondary data from commercial banks for a period of five years (2010 to 2014). The data was on levels of bank NPLs and bank specific characteristics notably, asset quality, operational cost efficiency, earnings ability, liqudity and bank size. The study findings indicate that 15.6 percent of variations in bank NPL levels is explained by variations in the bank specific characteristics. Specifically, there is a negative relationship between bank size, asset quality and levels of bank NPLs. There is also a positive relationship between liquidity, operational cost efficiency, earnings ability and levels of NPLs. The study recommends that bank managers should ensure that their liqudity is optimal to avoid custody of idle resources. Efforts should be put in place to support small banks so as to reduce their NPLs burdens and prudent lending techniques should be implemented to improve the specific banks’ asset quality. The study suggests that future research should consider longer time periods with different credit information sharing regimes. Other types of financial institutions should be considered in the studies that also look at credit officers demographic attributes and overall loan portfolio performance.
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