International Journal of Finance and Banking Research
Volume 6, Issue 2, April 2020, Pages: 28-36
Received: Mar. 23, 2020;
Accepted: Apr. 10, 2020;
Published: Apr. 30, 2020
Views 304 Downloads 230
Harwood Kajirwa Isabwa, Department of Economics, Accounts & Finance, Jomo Kenyatta University of Science & Agriculture, Nairobi, Kenya
Martin Wekesa Mabonga, Department of Economics, Accounts & Finance, Jomo Kenyatta University of Science & Agriculture, Nairobi, Kenya
Upsurge in the rate of non - performing loans in the Kenyan banking industry warranted a study to find out its effect on the profitability of the whole banking industry. The main objective of the study was to determine the effect of non - performing loans on the profitability of the banking industry in Kenya. A positivism research philosophy was adopted. The study used cross sectional and time series designs. Panel data about the Kenyan banking industry as a whole was incorporated in the study. Statistical package of social studies version 24.0 aided in data analysis. Pearson correlation and regression inferential statistical techniques were used in the study. The study found a strong negative relationship between nonperforming loans and profit after tax (r=-.754**, p value <.01). Non – performing loans had a significant negative effect on profitability of the Kenyan banking industry (β=-.754, p=007, α<0.01). The value of adjusted R-square is 0.521 implying that 52.1% of total variation of profitability of the Kenyan banking industry is explained collectively by nonperforming loans. The study concluded that non- performing loans has a negative significant effect on profitability of the Kenyan banking industry. In order to hedge against upsurge in the rate of non - performing loans the banking industry should enforce effective regulation, create awareness, and curb unproductive borrowings. There must be multiple level of approval to sanction huge loans. Moreover, there should be transparent mechanism and proper disclosure regulation.
Harwood Kajirwa Isabwa,
Martin Wekesa Mabonga,
Effect of Non Performing Loans on Profitability of the Banking Industry in Kenya, International Journal of Finance and Banking Research.
Vol. 6, No. 2,
2020, pp. 28-36.
Adeusi, S. O., Kolapo, F. T., & Aluko, A. O. (2014). Determinants of commercial banks’ profitability panel evidence from Nigeria. Internafional Journal of Economics, Commerce and Management, 3 (1), 1-8.
Ahmed, A. (2003). Trends in Profitability of banks in Nigeria: Before and during interest rate deregulation a comparative analysis. NDIC quarterly, 12 (1), 59-83.
Akerlof, G. A. (1970). The market for lemons: quality uncertainty and the market mechanism. Review of financial studies, 17 (2), 405-437.
Akinola, G. (2012). Effect of globalization on performance in the Nigerian Banking Industry. International Journal of Management and Marketing Research, 5 (1), 79-94.
Altman, E. I. (1984). A further empirical investigation of the bankruptcy cost question. The Journal of Finance, 39 (4), 1067-1089.
Azeem, A., & Amara, A. (2014). Impact of profitability on quantum of nonperforming loans. International Journal of Multidisciplinary Consortium, 1 (1), 1-14.
Baltagi, B. (2008). Econometric analysis of panel data. (4th Ed.). New Jersey: John Wiley & Sons.
Brealey, R. A., Myers, S. C., & Allen, F. (2011). Principles of corporate finance. (10th Ed.). New York: McGraw-Hill.
Central Bank of Kenya. (2001). Bank supervision Annual Report. Retrieved from https://www.centralbank.go.ke.
Central Bank Annual Report. (2018). Annual report and financial statements 2017/2018. Retrieved from https://www.centralbank.go.ke.
Cooper, D. R., Schindler, P. S., & Sun, J. (2006). Business research methods (Vol. 9). New York: McGraw-Hill Irwin.
Chen, X., Lee, C. W. J., & Li, J. (2008). Government assisted earnings management in China. Journal of Accounting and Public Policy, 27 (3), 262-274.
Crystal, J. S., Dages, B. G., & Goldberg, L. S. (2002). Has foreign bank entry led to sounder banks in Latin America?. Current Issues in Economics and Finance, 8 (1), 1-6.
De Franco, G., Kothari, S. P., & Verdi, R. S. (2011). The benefits of financial statement comparability. Journal of Accounting Research, 49 (4), 895- 931.
Fama, E. F. (2012). Efficient capital markets: II. The Journal of Finance, 46 (5), 1575-1617.
Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of financial economics, 67 (2), 217-248.
Goudreau, R. E., & Whitehead, D. D. (1989). FYI Commercial Bank Profitability: Improved In 1988. Economic Review-Federal Reserve Bank of Atlanta, 74 (4), 34 - 41.
Habib, M. A., & Bruce Johnsen, D. (2000). The private placement of debt and outside equity as an information revelation mechanism. The Review of Financial Studies, 13 (4), 1017-1055.
Hall, G. C., Hutchinson, P. J., & Michaelas, N. (2004). Determinants of the capital structures of European SMEs. Journal of Business Finance & Accounting, 31 (5-6), 711-728.
Hancock, D. (1989). Bank profitability, deregulation, and the production of financial. Journal of the Operational Research Society, 47 (8), 980-988.
Kaaya, I., & Pastory, D. (2013). Credit risk and commercial banks performance in Tanzania: A panel data analysis. Research Journal of Finance and Accounting, 4 (16), 55–62.
Kithinji, A. M. (2011). Credit Risk and Profitability of Commercial Banks in Kenya. Unpublished Masters Thesis, University of Nairobi.
Kiyai, T. K. (2003). Bad debts restructuring techniques and non-performing loans of commercial banks in Kenya. Unpublished PhD Thesis, University of Nairobi.
Kondo, K. (2018). Does branch network size influence positively the management performance of Japanese regional banks? Applied Economics, 50 (56), 6061-6072.
Kothari, C. R. (2004). Research methodology: Methods and techniques. India: New Age International.
Kroszner, R. S., Laeven, L., & Klingebiel, D. (2007). Banking crises, financial dependence, and growth. Journal of financial Economics, 84 (1), 187-228.
Macharia, J. N. (2012). The relationship between the level of nonperforming Loans and the financial performance of commercial banks in Kenya. Unpublished Masters Thesis, University of Nairobi.
Lind, D. A., Marchal, W. G., & Wathen, S. A. (2012). Statistical techniques in business & economics. New York, NY: McGraw-Hill/Irwin.
Mombo, A. C. (2013). The effect of nonperforming loans on the financial performance of deposit taking microfinance institutions in Kenya. Unpublished Masters Thesis, University of Nairobi.
Ogunleye, R. W. (1995). Monetary Policy Influence on Banks’ Profitability. NDIC Quarterly, 5 (4), 48-66.
Petersen, M. A., & Rajan, R. G. (2012). The benefits of lending relationships: Evidence from small business data. The Journal of Finance, 49 (1), 3-37.
Pinegar, J. M., & Lease, R. C. (2012). The Impact of Preferred-for-Common Exchange Offers on Firm Value. The Journal of Finance, 41 (4), 795-814.
Sabo, B. (2007). An Assessment of the Determinants of the Nigerian Banking Industry Profitability Using Panel Evidence from Nigerian Commercial Banks. Information Manager (The), 7 (2), 14-20.
Sanni, M. R. (2009). Short term effect of the 2006 consolidation on profitability of Nigerian banks. Nigerian Research Journal of Accountancy, 1 (1), 177-188.
Saunders, M., Lewis, P., &Thornhill, A. (2009). Business research methods. London: Financial Times, Prentice Hall.
Singh, Y. K. (2006). Fundamental of research methodology and statistics. India: New Age International.
Schnabl, G., & Hoffmann, A. (2008). Monetary policy, vagabonding liquidity and bursting bubbles in new and emerging markets: An over investment view. World Economy, 31 (9), 1226-1252.
Uchendu, O. (1995). Monetary Policy and the Performance of Commercial Banks in Nigeria. Central Bank of Nigeria Economic and Financial Review, 33 (2), 156-170.