The Effect of Loan Quality on the Profitability of Commercial Banks in Kenya
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Date
2022Author
Munene, Mercelyne, M
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
The study aimed at assessing whether profitability is affected by loan quality in
commercial banks in Kenya. The study adopted information asymmetry theory, capital
asset pricing model and adverse selection theory. The study conducted descriptive,
correlation and regression analysis on an unbalanced dataset of 39 licensed commercial
banks in Kenya all the way from 2012 to 2021. The research primarily used secondary
data sources of published reports from the Central Bank of Kenya. F-statistic were used
in establishing the model significance. Regression results suggest that loan quality has
a significant positive influence on performance of large banks. Profitability is not
influenced by loan quality in medium as well as small banks. Banks sizes influence on
performance of all commercial banks as well as small banks is significant (+vely). Size
has a positive insignificant influence on performance of medium sized as well as large
commercial banks. Operational efficiencys effect on the profitability of commercial
banks is negative. However, operational efficiency has an insignificant positive impact
on the performance of all commercial banks as well as large ones. Medium and small
banks profitability is not affected by operational efficiency. Capital ratios effect on
profitability of all commercial banks is significant(+vely). Capital ratio has a positive
significant influence on performance of large and small commercial banks but a
positive insignificant effect for medium banks. The effect of deposit ratio profitability
of all banks is significant (-vely). There is no effect of deposit ratio on the profitability
of large commercial banks. Deposit ratios effect on performance of medium and small
banks is significant (-vely). This study findings suggest that tier 1 banks have the lowest
loan quality among Kenyan commercial banks. This study advocates for commercial
banks to increase their asset levels, increase their loan quality, increase their deposits,
increase their capitalization as well as the operational efficiency for them to achieve
higher profitability levels.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- Faculty of Arts [710]
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