Does Monetary Policy Influence Non-performing Loans of Listed Commercial Banks in Kenya?

Abstract

The Kenya banking sector plays a crucial role in Kenya’s economy despite the prevailing macroeconomic headwinds in the Country. The Banking Sector Industry Report of 2023 indicated that the banking sector contributed to 66% of gross domestic product as of December 2022. The high levels of non-performing loans remain a concern in the Kenya banking sector. The study sought to assess the influence of monetary policy on non-performing loans in the banking sector in Kenya. The target population is all listed commercial banks in Kenya. Using monthly secondary data from November 2019 to September 2023 obtained from the Central Bank of Kenya, the study utilized a multiple regression model to estimate the influence of monetary policy on the percentage growth of nonperforming loans of listed commercial banks in Kenya. Findings pointed out that Repo rates and Treasury bill rates do not influence non-performing loans of listed commercial banks in Kenya as measured by the gross non-performing loans ratio as exhibited by the P-values of 0.327866 and 0.577173 respectively, which is greater than 0.05. The results also implied that the central bank rate and interbank rates do influence non-performing loans of listed commercial banks in Kenya as measured by the gross non-performing loans ratio as illustrated by the P-values of 0.028844 and 0.00018 respectively, which is less than 0.05. According to the findings, the study recommends that policymakers should prioritize creating a strong financial ecosystem so that monetary policy can be utilized to regulate commercial bank interest rates. This will, in effect, serve to decrease the expansion of non-performing loans, reduce risk and entice competitors into the financial sector, enhance the capital base, increase lending to promote feasible projects, and, as a result, stimulate the country's growth.