Determinants of Lending Behaviour of Commercial Banks in Kenya

Abstract

The banking industry in Kenya has grown tremendously. Commercial banks have an advantage in providing a large variety of financial services to their clients since they are capable of mobilizing more funds. However, the industry has faced shocks such as the global financial crisis of 2008-2009 which led to some banks posting losses and decreasing their lending. The main objective of this study was to establish the determinants of lending behaviour among commercial banks in Kenya with the specific objectives of exploring the effect of bank specific characteristics and external factors on lending behaviour of commercial banks in Kenya. The study employed secondary panel data collected from 35 commercial banks in Kenya for a period of ten years (2006-2015). The Fixed Effects Model was used in estimation. Significance was evaluated at 1%, 5% and 10% levels. Estimation results showed that bank capitalization, volume of deposits, and interest rate spread were positive and statistically significant while real GDP growth rate was found to be statistically significant with negative effects respectively on total loans advanced by commercial banks in Kenya. Based on the study result, the study recommends for comprehensive review of bank’s assets and investment strategies since capitalized banks are capable of mobilizing more funds. There is need for policy makers to come up with policies that enhance deposit rates in the Kenya’s financial sector. Commercial banks may also reconsider its pricing strategy, offer more attractive products and maintain better banking relationships with their clients. Finally, the study recommends reexamination of good or bad project that are funded by Commercial banks during periods of economic booms or recessions.