The relationship between loan policy and financial performance of commercial banks in kenya.

Abstract

Nature of loan terms and conditions have a large effect on the bank's competitiveness, the loan policies a bank adopts affect the volume of loan applications that a bank attracts ( Said and Mohd, 2011). The nature of the credit policies adopted by the banks influence the volumes of the loans procured by the banks and thus the competitiveness of the bank in lending and thus the performance in the industry ( Sangmi , 2010). The study sought to answer the following research questions; what are the loan policies adopted by Commercial Banks’ in Kenya? What is the relationship between loan policy and financial performance of commercial banks in Kenya? This study adopted a descriptive survey research design. The target population of this study was all the 43 commercial banks in Kenya (CBK, 2012). The sample size for the study was 13 commercial banks. Stratified random sampling technique and simple random sampling techniqu e were used to obtain a sample size of 13 commercial banks. The secondary data was collected from the published annual reports spanning five years (2009 - 2013) for the sampled commercial banks. Regression analysis was used to test the relationship between l oan policy and financial performance of commercial banks in Kenya. From the findings, the provision for bad and doubtful debts was positively related to the financial performance of the Kenyan commercial banks. Declining loan default rate significantly en hanced the financial performance of the Kenyan commercial banks. Collateral significantly enhanced the financial performance of the Kenyan commercial banks. There is a positive relationship between loan policy and financial performance of the Kenyan commer cial banks . The management of the commercial banks should institute strict loan recovery measures in order to reduce the amounts spent on provisions for bad and doubtful debts . This would in turn increase the banks’ interest earnings on loans, significantl y enhancing the financial performance of the commercial banks. The management of the commercial banks should conduct due diligence of its clients to correctly establish capacity of the customer to repay. This will in turn grow the banks’ performing loans t hereby further enhancing their financial performance