Factors Affecting Non - Performing Loans:A Case Study of Equity Bank (K) Limited, Limuru Town , Kiambu County

Abstract

This research sought to investigate the factors affecting non-performing loans using a Case Study of Equity Bank (k) Limited in Limuru Town, Kiambu County. The objectives were to assess how interest rates, number of lending institutions, literacy levels and collateral requirements by Equity Bank affect non-Performing Loans. The research methodology used was a descriptive survey design and the population of the study consisted of the Clients of Equity Bank in Limuru Town, the credit Staff, and some government officials. Information collected was by use of questionnaires which made use of both open and closed ended questions and Interview Schedules for the Credit Staff and government officials. The questionnaire used a five point liker scale which ranged from strongly agree to strongly disagree. Data was edited for accuracy, uniformity, consistency and completeness and arranged to enable coding and tabulation for final analysis. Purposive sampling techniques was applied in selecting key informants particularly experts in the Banking Industry, government Officials from the financial Departments and Credit Officers from Equity bank while stratified sampling technique was employed in recruiting clients of Equity Bank within Limuru. The findings revealed that interest rates charged and nonperforming loans are inter-related. In particular, it increased the cost of loans charged on the borrowers hence they are most likely to default these loans. The results also disclosed that nonperforming loans were indeed affected by the clients’ literacy levels because understanding of credit terms is crucial in loan repayment. The study also concluded that the number of lending institutions had some influence on non-performing loans in that it increases them especially due to Multi-borrowing. Finally the findings revealed that collateral demanded by the bank had a strong influence in controlling the rate of non-performing loans as people fear losing their assets. The study recommends that there is need for central Bank to put regulations on interest rates charged by financial institutions. In addition, there is need for financial literacy trainings for both customers and Credit Officers as well for clear understanding of credit terms. Finally, the financial institutions need to adopt a default risk model which can help ascertain the level of risk and mitigate these risks while giving Loans.