Effects of Macro-economic Variables on Nonperforming Loans of Commercial Banks in Kenya

Abstract

Macro-Economic variables greatly influence the economic growth. They deal with the performance, structure, behaviour, and decision-making of an economy as a whole, rather than individual markets. Non-Performing Loans allow the government to reduce the size of transfers required to boost employment. The identification of needy firms and the tailoring of subsidies to each firm losses means that non-performing loans require much smaller transfers than either direct subsidies or low interest rate loans. The study thus sought to establish the effects of macro-economic variables on non-performing loans in commercial banks of Kenya. Taking a descriptive design, the study was based on a population of fifteen banks out of the existing forty four commercial banks for the period of ten years 2003-2012. Systematic random sampling was used to select the required samples from the population, where secondary data was used as obtained from CBK database as all banks are expected to file their annual financial results with CBK. The research was both quantitative and qualitative in nature. Analysis was done with aid of the statistical package for social sciences (SPSS) package. Descriptive statistics generated such as percentages, mean scores and proportions were presented in tables and figures. . It was found that a strong correlation existed between inflation and gross domestic product and current account deficit. GDP also correlated strongly with inflation and Money supply. CAD correlated strongly with inflation only while Money supply correlated strongly with GDP. The study recommends that for a great economic growth, there is need to mainstream these microeconomic variables for a better performing, structurally viable and for effective decision-making of the economy as a whole, rather than individual markets.