Factors Affecting the Performance of Loan Potofolio of Commercial Banks in Kenya,

Abstract

The banking industry plays a major role in economic growth and development of a country through provision of credit facilities to customers in order to carryout economic activities. However, the major concern for any commercial bank is whether they will get their cash back after lending and if there is any value earned on the principal amount. Although commercial banks have procedures and regulations that they use in administering credit, they still have customers defaulting on loan repayments and thus increasing the effects of bad debts. Several theories have emerged both empirical and theoretical on factors leading to the increase of non-performing loans; however they have not fully addressed the issues pertaining the same. The performance of the loan portfolio in commercial banks has therefore not produced the expected returns. The objective of this study was to establish the relationship between loan interest rates and the performance of loan portfolio in commercial banks, determine the effect of bank policies and procedures on the performance of loan portfolio ,analyse the extent to which collateral affects the performance of loan portfolio and to establish the relationship between ecological factors and performance of loan portfolio of commercial banks .The research was a cross sectional survey of selected banks in Machakos county. There are forty three (43) commercial banks in Kenya and a total of all the twelve (12) commercial banks in Machakos were used in this study. A questionnaire was used to gather the primary data. The questionnaire was self- administered and the drop and pick later method was adopted. One (1) Branch Manager, One (1) credit manager and two (2) credit officers were chosen from each of the twelve (12) commercial banks, bringing the target population to 48 respondents who were used to obtain the data. Descriptive statistics was used to analyse the data and findings presented using tables and other graphical presentations for ease of understanding and analysis. The study found out there was a rapid increase in the number of nonperforming loans in commercial banks, loan interest rates affects the performance of loan portfolio up to 40.3%, bank policies and procedures up to 15.6%, collateral up to 35.9%and ecological factors up to 99% .This implied that there was a positive relationship between loan interest rates, bank policies and procedures, collateral and ecological factors and the performance of loan portfolio of v commercial banks. The study recommended that banks should come up with strategies to reduce on the turnaround time for credit facilities in order to improve on customer satisfaction which in turn will reduce the number of non-performing loans. The study also recommended that banks should be involved in the review of interest rates, both customers and employees should be involved in the review of the banks policies and procedures, the amount of unsecured loans should be reduced and the political leadership of the country should allow the banks to be controlled by the regulator only.