The effect of non-performing loans on the size of the loan portfolio in commercial banks in Kenya

Abstract

The 43 licensed commercial banks, as governed by the Central Bank of Kenya, play a key role in the Kenyan economy and as such, the factors affecting their main business of lending are of great importance. The study sought to determine the effect of nonperforming loans on the size of the loan portfolio within these banks by using a census study with the population consisting of all the commercial banks in Kenya. Secondary data was collected from the financial statements of these banks and multiple linear regression analysis used to analyse the data. The study revealed that there is a negative and insignificant correlation between non-performing loans and the size of the loan portfolio. In addition, there is a positive and significant correlation between the volume of deposits and size of the loan portfolio and a negative significant correlation between the share capital investment and size of the loan portfolio as well as other earnings assets and size of the loan portfolio. The statistically insignificant effect of the non-performing loans on the size of the loan portfolio is expected to be due to the non-performing loans being below the acceptable threshold level of the commercial banks. The study recommends that commercial banks in Kenya maintain their non-performing loans at a level below the acceptable threshold in order to limit the effect of these loans on the size of the loan portfolio.