The Relationship Between the Level of Nonperforming Loans and the Financial Performance of Commercial Banks in Kenya

Abstract

This research project sought to establish the relationship between the non-performing loans issued by commercial banks in Kenya and the financial performance of all commercial banks in Kenya. Non- Performing loans (NPLs) are the portfolio loans issued by banks but they are not paid up and not written off either. The population of the study was all the 43 commercial in Kenya at the period of the study. The period of study was 2005 to 2011. The data used was secondary from financial statements of the commercial banks for years of the study. Data was also obtained from Central Bank of Kenya. The measure financial performance was ROA. The non performing loans were regressed against the returns on the assets of the commercial banks to show the influence of the former on the latter. In the early years of the study, the levels of nonperforming loans were very high with the financial performance in terms of ROA being very low. With time however, the levels of nonperforming loans significantly reduced with the profitability levels increasing significantly. Banks should therefore put emphasis on borrower analysis before issuing any loan.