Relationship Between Non Performing Loans And Economic Growth: A Case Study Of Commercial Banks In Kenya

Abstract

This study sought to investigate the relationship between economic growth and non-performing loans among the Kenyan commercial banks for 1980Q1 – 2015Q4 period. To achieve this objective, the study used quarterly data sourced from Kenya Bankers Association and Central Bank of Kenya. The study involved regression on an econometric model with the gross non – performing Loans as the dependent variable and real economic growth rate as the independent variable. In addition other macroeconomic variables were included as control variables in the model. These were budget deficit, domestic credit, exchange rate, inflation rate, average savings rate and average lending rates. Ordinarily Least Square method was used to estimate the model using EVIEWS. The main finding of the study is that economic growth and non – performing loans are negatively related as evidenced by correlation coefficient between the two. On the effect, the study found that a one percent increase in the economic growth rate reduces the non – performing loans by 0.2238 percent holding other factors constant. Based on this finding, the study advocates for the need to have supportive macrocosmic environment that would promote economic growth and ultimately helping lower non – performing loans levels in Kenya.