The relationship between changes in Central bank rate and the level of non-performing loans in commercial banks in Kenya

Abstract

The Kenyan Banks for last five years have faced drastic changes in central bank rate hence forcing commercial banks to increase their base rate. Majority of borrowers have always rushed to the banks to as to loan restructuring when changes in bank rate occur, however banks have been adamant to restructure such loan hence making the borrower unable to repay their loans. The above problem has lead to the rise of none performing loans in commercial banks making banks to declare huge losses Faced with this scenario, the purpose of this study was to establish the relationship between changes in central bank rate and the level of none-performing loans in commercial banks in Kenya. The research design employed in this study was descriptive in nature. The target population in the study was a total of 43 commercial banks in Kenya. The secondary data for five years (2007-2012) was obtained from annual publications by central bank as well as financial statements of commercial banks. Multiple linear regression Analysis was used to examine the relationship between CBR and NPL in commercial banks in Kenya Based on the findings, the study concludes that while central bank rate has a negative significant effect on net non-performing loans, interest rates charged by commercial banks very much affect non-performing loans positively so that an increase in this rate results into an increase in net non-performing loans. It is recommended that central bank through its mandate to ensure economic stability through monetary policy, could occasionally help commercial banks by increasing the bank rate so as to send panic wave to borrowers from commercial bank.