International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online) Vol. 7, Issue 2, pp: (346-361), Month: October 2019 - March 2020, Available at: www.researchpublish.com
Determinants of Loan Non Performance in Kenya Commercial Banks Edah Kavwanyiri Kaimosi Friends University College.
Abstract: Non-Performing loans are one of the key causes of banks breakdown in Kenya commercial banks. The following study sought to deeply investigate on determinants of nonperforming loans and thereafter come up with recommendations in regard to nonperforming loans problem. The general objective of the study was to assess the determinants of loan nonperformance in Kenya commercial banks. The study was guided by the following specific objectives: To determine the effect of Bank Ownership structure on loans nonperformance in Kenya commercial banks and to determine the effect of Credit Monitoring on loans nonperformance in Kenya commercial banks. The study employed descriptive research design where quantitative approach was applied. Census was adopted where data was obtained from 43 commercial banks in Kenya and analyzed using SPSS version 23 by applying both correlation and regression to show relationship between the variables. The results showed that both Bank ownership structure and credit monitoring were statistically significant in relation to Non performing loans. The study recommended that the bank management should take key issues on asset quality of the bank specifically loan performance for prevention of nonperforming loan thus can give due emphasis on the asset management decision then manage them efficiently. Management should also put into consideration the process and procedures in regard to credit monitoring. The internal risk management process must be sophisticated, proactive and adaptable handled by risk management staff and external partners, who can effectively and routinely assess, quantify, prioritize and address Non performing loans in depth. Keywords: Bank Ownership Structure, Credit Monitoring, Non performing Loans.
1. INTRODUCTION 1.1 Background of the Study In the recent past, the universal financial crisis and the succeeding recession in many developed and developing countries have increased firms’ defaults, causing significant losses to the banks. Case of Kenya is no difference where some banks have gone into bankruptcy and liquidation due to various non-performing loans. If a bank does not receive a timely partial or full payment of a loan, it should classify this as a problem loan and the value of the loan on the bank’s financial statements should be adjusted to reflect this. By recording them in this way stakeholders, management, regulators and other individuals will have a clearer picture of the true value and strength of the bank (Apostolik and Donohue, 2015). Therefore, problem loans are defined as financials agreements wherein the borrowing party did not pay the interest and/or installments according to a structured schedule. In other words, loans will be defined as NPLs when they do not generate income for the bank and thus cease to be in accordance with the loan agreement (Anjom & Karim, 2015). Rossi (2005), examined a sample of 278 banks in nine transition countries, from 1995 to 2002, using the Grangercausality techniques to test the associations among cost efficiency, bank capital and loan quality. They established that increases in NPLs are typically followed by decreasing cost efficiency. This happens since banks increase expenditure on monitoring, becoming more industrious in administering the portion of their prevailing performing loan portfolio. Further, decreasing cost efficiencies are usually followed by increasing NPLs, due to poor management practices, such as excessive expenditure and monitoring practices. Furthermore, they highlight that low bank capital ratios may encourage management to take on more portfolio risks, increasing non performing loans. Keeton and Morris (1987) emphasized on the concept of moral hazard, discovering that commercial banks with low level of capital to asset ratio are encouraged to accept high risk in their loan portfolio. As a result of this, the level of non-performing loans have gone up.
Page | 346 Research Publish Journals