Effect of Non Performing Loans on Profitability of the Banking Industry in Kenya

Abstract

Upsurge in the rate of non - performing loans in the Kenyan banking industry warranted a study to find out its effect on the profitability of the whole banking industry. The main objective of the study was to determine the effect of non - performing loans on the profitability of the banking industry in Kenya. A positivism research philosophy was adopted. The study used cross sectional and time series designs. Panel data about the Kenyan banking industry as a whole was incorporated in the study. Statistical package of social studies version 24.0 aided in data analysis. Pearson correlation and regression inferential statistical techniques were used in the study. The study found a strong negative relationship between nonperforming loans and profit after tax (r=-.754^**, p value <.01). Non – performing loans had a significant negative effect on profitability of the Kenyan banking industry (β=-.754, p=007, α<0.01). The value of adjusted R-square is 0.521 implying that 52.1% of total variation of profitability of the Kenyan banking industry is explained collectively by nonperforming loans. The study concluded that non- performing loans has a negative significant effect on profitability of the Kenyan banking industry. In order to hedge against upsurge in the rate of non - performing loans the banking industry should enforce effective regulation, create awareness, and curb unproductive borrowings. There must be multiple level of approval to sanction huge loans. Moreover, there should be transparent mechanism and proper disclosure regulation.