The Relationship Between Group Lending, Individual Lending and Non Performing Loans of Commercial Banks in Kenya

Abstract

The researcher conducted the research designed to establish the relationship between Group Lending and Individual Lending and Non Performing Loans of Commercial Banks in Kenya. A t test designed to establish whether there is any difference between the proportions of NPLs in both Group Lending and Individual Lending was done. The graphical representation and the scatter graphs showed a mixed picture with some banks showing one loan scheme having a higher incidence of Non Performing Loans while another cohort showed the alternative scheme as having a higher incidence. This finding is consistent with the findings of a similar research documented by Armendariz and Murdoch (2005). The researcher found that there was no evidence that any of the schemes had a higher incidence of NPLs than the other. The t test done by the researcher yielded test statistics that were less than the critical values of the t distribution and thus the null hypothesis was accepted. This means that the researcher established that there is no relationship between Group Lending and Individual Lending and Non Performing Loans of Commercial Banks in Kenya. Both schemes showed equivalent probability of NPLs and thus none is better than the other. This issue is important and worth of further research because according to Bernstein (1996) the level of Non-Performing Loans is a significant determinant of bank costs as well as estimates of scale economies in banking. The researcher thus recommended further research on the other factors found to influence the level of NPl‟s as pointed out by Mbote (2006). This is an important aspect so as to establish which of those factors pose a higher credit risk to lenders and thus Commercial Banks in Kenya should keenly focus on them to improve the performance of their loan books.