Responses of commercial Banks in Kenya to the challenge of loan defaulting

Abstract

Loan defaulting has been and continue to be a big threat to the banking industry both locally as well as globally. Many banks have sought to find ways of dealing with this threat but in vain. It is this threat that this research sought to unravel by studying the challenges that the banking industry face with regard to loan default. The research sought to further look at how the banking industry in Kenya respond to the challenge of loan defaulting. The two issues above set up the cornerstone of the research objectives for this study. The survey instruments targeted the entire banking fraternity with a random sample of 22 banks out of the 43 commercial banks currently in the republic. Data was collected through the use of questionnaires which had both Yes/No as well as multiple choices. A response rate of 82% was received from the number of questionnaires issued to respondents. Data analysis employed the use of percentages and tables for collation and summarization of data gathered.This research found out that the main challenge that banks face in light with loan defaulting was loss of funds lent to the borrowers. Other challenges which were of notable mention were; accountability to stake holders of monies lent, liquidity problems among others. The data indicate that many banks do not face serious problems with Central bank of Kenya. The research further found out that banks employ many response mechanisms to curb loan defaulting. Of notable importance was use of credit reference bureau 82% of the respondents, use of stringent legal action, auction of security collateral, employment of technology when rating loans, offering of secured loans among other measures. The study established that there is a significantly regulatory role which needs to be played by Central Bank of Kenya (CBK), Kenyan Parliament, and use of information technology. In addition, it was found that there is need to make public asset as well as liability declaration mandatory to all civil servants as well as cabinet ministers to curb political lending. The research further established that integrity is vital in the banking industry and that each bank offering loans should ensure it sets up a credible and well equipped loan processing department. The research takes cognizance to the fact that in order to arrest the menace of loan defaulting, there is need to have a concerted effort among all the stakeholders in the industry.