Impact of ESG Performance in Mitigating Non-Performing Loans in Kenya’s Commercial Banks

Commercial banks are concerned with the provision of credit facilities in form of loans and advances to customers. These loans and advances are expected to be repaid by customers in line with the agreement reached with their bankers. Customers’ default in the repayment of loans and advances at the agreed period may lead to bad and doubtful debts and this can affect the financial health, profitability and going concern status of the bank. This study empirically explored the effect of credit risk management on the financial performance of nine listed commercial banks in Kenya for the period, 2018-2022. Credit risk management as the independent variable, was surrogated by two parameters- loans to deposit ratio and Non-performing Loans ratio. Return on Assets was used as a proxy for financial performance of the listed commercial banks in Kenya. The study utilized the information asymmetry theory and the theory of moral hazard and adverse selection. A correlational research design, using secondary data derived from listed commercial banks’ annual audited reports and information from Nairobi Securities Exchange was used in this study. The target population of the study was the nine listed commercial banks in Kenya. A pilot study was carried by performing the normality and multi-collinearity tests from the sample data collected for purposes of assessing the reliability and validity of the model. A census method was adopted in data collection since the target population was manageable. Collected data was analyzed using the Statistical Package for Social Sciences Version 28 where both descriptive and inferential statistical methods were used to describe and depict the results (Mean, Standard Deviation, Correlation, Regression and Analysis of variances). The findings of the study revealed a statistically significant regression effect and indicative of accomplished prediction of financial performance of the listed commercial banks through the F-calculated value which showed that the model was significant. Loan to deposit ratio explained .4% (r =.280) of financial performance of listed commercial banks in Kenya and non-performing loans ratio -36.5% (r=-.681) of financial performance of the listed commercial banks in Kenya. The study will be expected to add to the existing literature in the finance field and more importantly, the credit risk management in commercial banks and other related sectors. The study recommended that; management balance the ratio of financing between equity, debt and customer deposits to extend lending capacity, and generate high earnings volume; desist from holding capital without investing for improved financial achievement; management should maintain a moderate level of Loans and advances to deposit ratio since it is a measure of the banks’ ability to survive withdrawals, because higher rates lead to liquidity problems; give credit-risk management prominence in their strategic policies and finally, due to the continuous deterioration and accumulation of the nonperforming loans, management ought to strengthen loan recovery measures. Keywords: Credit Risk Management, Financial Performance, Listed Banks, Equity Multiplier Ratio, Capital Adequacy Ratio, Nonperforming Loans

The rise in non-performing loans in Kenyan commercial banks over the past ten years has created instability in the financial industry. Due to their impact on borrowers' ability to repay the loans, high-interest rates are a contributing factor to non-performing loans. The interest rate on loans has an implicit cost that is inherent to bank credit and has an impact on loan defaults. In this sense, a large percentage of non-performing loans (NPLs) in Kenya’s Commercial banks has continued to impede economic expansion due to high default rates experienced by many banks making them unable to advance new loans. The study investigated the influence of bank lending rates on nonperforming loans in listed commercial banks in Kenya using secondary monthly data from November 2019 when the interest capping was repelled to September 2023. Secondary data was obtained from the Central Bank of Kenya Monthly Statistical Bulletin. Inferential statistics using regression analysis was utilized to analyze the data. The regression model results showed that bank lending rates had a positive and statistically significant effect on non-performing loans of listed commercial banks in Kenya as illustrated by a P-value of 0.0000000054, which is less than 0.05. The results implied that lending rates do influence non-performing loans of listed commercial banks in Kenya as measured by the gross non-performing loans ratio. Policymakers in Kenya need to control lending rates to reduce the rising rates of non-performing loans.

Non-technical summary The research paper studies business sophistication, tax revenue policies, and ESG (Environmental, Social, and Governance) performance across 105 Belt and Road Initiative (BRI) countries spanning from 2013 to 2021. Key insights from the study underscore a positive association between business sophistication and ESG performance. This suggests that organizations leveraging advanced knowledge and innovation are better positioned to implement effective ESG strategies. Moreover, higher tax revenue is linked to better ESG, underlining a commitment to sustainability within the business landscape. Notably, Information, Communication, and Technology (ICT) emerges as a pivotal catalyst in augmenting ESG performance, particularly when integrated with business sophistication and tax revenue mechanisms. Technical summary This study examines the relationship between business sophistication, tax revenue policies, and ESG (Environmental, Social, and Governance) performance in 105 Belt and Road Initiative (BRI) countries from 2013 to 2021, focusing on the moderating role of Information, Communication, and Technology (ICT). Using advanced econometric methods like Two-Stage Least Squares (2SLS), two-step Generalized Method of Moments (GMM), and fixed-effect regression, the research also considers factors such as microfinance institutions, commercial bank financing, and the COVID-19 pandemic. The findings reveal a significant positive link between business sophistication and ESG performance, indicating that companies with advanced knowledge and innovation are more likely to implement successful ESG policies. Higher tax revenue is also positively correlated with ESG improvements, reflecting support for sustainability. ICT is crucial in enhancing ESG performance, especially when combined with business sophistication and tax revenue. Microfinance and commercial banking are vital in promoting ESG practices in BRI countries. Despite a temporary decline in ESG performance due to COVID-19, the study predicts a post-pandemic resurgence, emphasizing the need to foster an innovation culture for sustainable development. Social media summary There is a positive association between business sophistication, tax revenues, microfinance, ICT, and commercial banking, which are key drivers of better ESG performance in BRI countries.

Does ESG performance reduce banks’ nonperforming loans?

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.

Commercial banks plays a crucial role in the Agricultural sector in advancing farmers affordable credit to improve their productivity, enhancing their food security, and expanding their income. Financing of the sector however continues to get the lowest levels of credit in Kenya compared to other sectors due to poor loan repayment. This study aimed to establish the effect of macro-economic factors of Gross Domestic Product (GDP), Real Effective Exchange Rate, and the Lending rate on Agricultural Non-performing Loans (NPL) and to assess the effect of Growth in Loan Portfolio on Agricultural NPL. Secondary data relating to Commercial Banks lending to the agricultural sector for a period of 7 years from 2011 to 2017 was collected from forty-two Commercial Banks in Kenya. Results showed that agricultural NPL had a strong positive correlation with real GDP (0.836, p<0.001), the Real Effective Exchange rate (0.865, p<0.001), and a weak inverse correlation with the average Bank Lending rate (-0.48, p<0.01). The study concluded that commercial banks should pay close attention to the two factors (Gross Domestic Product and Real Effective Exchange rate) when providing loans to the agricultural sector to reduce the level of impaired loans. The banks active in agricultural lending should, therefore, take the performance of the real economy into account when extending loans given the reality that loan delinquencies are likely to be higher during periods of economic boom as suggested by the study results. Equally Commercial banks should trade with high prudence to curb a possible impairment due to reckless lending and over-estimation of the borrower’s ability to pay back. They should constantly review the complexity and diversity of the new loans to the agricultural sector periodically like quarterly, and do aging analysis to ensure that the growth in agricultural loans do not serve to window dress the portfolio at risk percentage while the actual amounts in default are increasing.

Purpose – the aim of this study is to specify the factors affecting the non-performing consumer loans in deposit banks operating in Turkey. Besides the internal factors specific to banks, the effect of macroeconomic factors is also investigated. Research methodology – monthly data of deposit banks operating in Turkey and data on macroeconomic indicators for the period 2005:1–2021:12 is used is the study. With these data, ARDL bound testing approach is applied. If there is cointegration relation between variables, the long and short run coefficients are estimated. Findings – with the two different models created in the study, it has been specified that macroeconomic variables and internal variables have a cointegration relationship with non-performing loans. The rise in loan interest rates and unemployment rate increase the rate of non-performing consumer loans. Conversely, the increase in deposit interest rates and the dollar exchange rate decreases the rate of non-performing consumer loans. For internal factors, it is determined that the increase in the capital adequacy standard ratio and the return on assets decreases the ratio of non-performing consumer loans. Research limitations – the major limitation of this study is to research only the factors affecting the non-performing consumer loans ratio for Turkey. Practical implications – the results obtained in the study are valuable for bank managers and investors. Administrative decisions and investment decisions by considering the factors affecting the non-performing consumer loans ratio will increase the performance of both groups. Originality/Value – studies in the literature generally consider non-performing loans for banks as a whole. However, determining the factors affecting the non-performing loans ratio on the basis of loan types will make a significant contribution to the literature. For this reason, the factors affecting the non-performing consumer loans for the Turkish market is investigated, thus contributing to the literature.

Currently, there is a financial crisis affecting commercial banks in Kenya occasioned by high levels of loan loss provision as a result of Non-Performing Loans. The past decade has seen the collapse of major banks like Chase Bank among others. This trend on Non-Performing Loans of the institutions requires urgent measures to reverse failure to which the entire sector is likely to collapse, and customers would lose a significant amount of their deposits. This study sought to investigate the effect of credit risk and liquidity risk on non-performing loans (NPLs) of commercial banks in Kenya and appraise the moderating effect of firm age on the relationship between financial risk exposure on non-performing loans of commercial banks in Kenya. The study was underpinned by liquidity preference theory. The examination adopted a positivist paradigm guided by explanatory research design. The study targeted 40 commercial banks as the unit of analysis while branch managers, operations and risk managers were the units of observation drawn from the banks adding to 120 respondents and census was used. The study collected both primary data using structured questionnaire on the independent variable and secondary data from publications by Central Bank of Kenya (CBK) and respective banks and the same was analyzed through the statistical package for social sciences (SPSS) version 26 in a descriptive and inferential manner. The study established that credit risk (p&lt;0.05) and liquidity risk (p&lt;0.05) were all found to have significant effect on NPLs of commercial banks in Kenya and significantly moderated by their sizes. It was concluded that financial risk exposure has significant effect on NPLs of commercial banks in Kenya. It was recommended that finance manages working in commercial banks in Kenya to balance the investment in short term and long-term assets to maintain operational liquidity levels for better management of liquidity risks. Credit managers working for commercial banks in Kenya need to review the existing credit risk management efforts and mechanisms to minimize exposure to NPLs.

The present study analyzes the influence of leverage, operating efficiency, non-performing loan, and capital adequacy ratio on the profitability of commercial banks in Bangladesh. The study selected four state-owned commercial banks and six private commercial banks as samples purposively. The study uses secondary data collected from annual reports of sample banks. The study covers balanced panel data for a period of four years from 2017 to 2020. Panel data regression model applies to meet the research questions and hypotheses of the study. The analytical result of the study shows that the leverage as measured by the debt-equity ratio (DER) has a negative and insignificant influence on profitability (ROA). Non-performing loan (NPL) has also a negative and insignificant effect on ROA. Higher DER and NPL lower the profitability position of the bank. The study finds that the operating efficiency as measured by BOPO ratio has a positive and insignificant impact on ROA. The study reveals that the capital adequacy ratio (CAR) has a positive and significant effect on ROA. The present study recommends that banks should be rational about the debt financing and selection of appropriate borrowers for upholding the healthy financial position in Bangladesh.

This study examines the effects of non-performing loan and operational efficiency on profitability of Nepalese commercial banks. Return on asset and return on equity are selected as the dependent variables. Similarly, loan to deposit ratio, capital adequacy, loan loss provision, non-performing loan, operating income and operating expenses are selected as the independent variables. This study is based on secondary data of 15 commercial banks with 105 observations for the study period from 2015/16 to 2021/22. The data were collected from Banking and Financial Statistics published by Nepal Rastra Bank(NRB), annual reports of the selected commercial banks and reports published by Ministry of Finance. The correlation coefficients and regression models are estimated to test the significance and importance of loan to deposit ratio, capital adequacy ratio, loan loss provision, and non-performing loan, operating income and operating expenses on the profitability of Nepalese commercial banks. The study showed that that loan loss provision ratio, non-performing loan ratio and capital adequacy ratio are the positive impact return on assets (ROA). It indicates that higher the loan loss provision ratio, non-performing loan ratio and capital adequacy ratio, higher would be the bank return on assets (ROA) of commercial banks in Nepal. Similarly, the study also shows that loan to deposit ratio, operating income ratio and operating expenses ratio have a negative impact on return on assets (ROA). It indicates that higher the loan to deposit ratio, operating income ratio and operating expenses ratio lower would be the return on assets of Nepalese commercial banks.

The People’s Bank of China in 2013 released a report revealing that the balance of non-performing loans of Chinese banking financial institutions had rebounded for the first time since 2005. In this situation, establishing early warning models – to recognize the factors that influence non-performing loans, and take effective measures to prevent defaults and control the banks’ credit assets – has become a major new issue. This paper examines the determinants of the non-performing loans (NPL) ratio in the Chinese banking sector from 2005 to 2011 using a panel data model. This model incorporates a new factor called distance to default (DD). The results show that the rates of change of total asset size, commercial loan ratio, and distance to default correlate negatively with NPL. There are positive correlations between capital return ratio, net interest margin, and single-lag NPL with NPL. However, there is no significant correlation between the proportion of shareholders’ equity, or the proportion of total loans, and NPL. In conclusion, this study suggests that regulators should consider and pay more attention to all these banks’ operational indicators to control NPL.

Purpose: This study examines the impact of non-performing loans on the profitability of Nepalese Commercial Banks. Methods: The data were analyzed using a multiple regression, descriptive, and correlational model. Up until February 2024, the combined data of five commercial banks with the lowest paid-up capital out of the twenty commercial banks was examined. Return on equity and return on assets are the study’s dependent variables, while the capital adequacy ratio, non-performing loan ratio, cash reserve ratio, and bank size are its independent factors. Results: The results show that several financial metrics, including bank size, cash reserve ratio, non-performing loan ratio, and capital adequacy ratio, are important determinants of ROA and ROE. Highlighted are significant problems with non-performing loans and impairment expenses. Conclusion: Non-performing loans significantly impact bank profitability, as evidenced by their positive correlation with reduced returns on assets (ROA) and returns on equity (ROE). This underscores the importance of effective management and mitigation strategies for non-performing loans to safeguard the profitability and stability of banks in Nepal. Moreover, the analysis highlights the interconnectedness of various financial metrics with bank profitability.

Background: Capital is a fundamental component for any organization's existence and operation. It serves as the lifeblood for initiating and sustaining businesses, regardless of their scale. The purpose of the research is to evaluate the financial performance of Nepalese commercial banks' capital adequacy ratios. Considering the performance of Nepalese commercial banks, it explicitly investigates the impact of capital adequacy ratio, cost income ratio, debt to equity ratio, equity capital to assets, bank size, and liquid ratio.Methods: This study investigates the impact of capital adequacy on the profitability of commercial banks in Nepal, utilizing secondary data from all commercial banks spanning 2013 to 2022. Analyzing 20 commercial banks, the research reveals that Nepalese commercial banks, on average, generate a respectable profit with typical return variance. The Capital Adequacy Ratio (CAR) consistently surpasses the 10% regulatory threshold, ensuring compliance with Basel III requirements and NRB directives. Results: The Average Assets Ratio (AAR) signifies a proactive approach to lending, contributing to enhanced profitability, while the Government Securities to Total Investment Ratio (G-STIR) indicates risk-averse practices with investments in risk-free assets. The Non-Performing Loans Ratio (NPLR) reflects the challenge of balancing low returns and high risk associated with non-performing loans. Correlation coefficients reveal complex relationships, indicating that increased capital, debt, and non-performing loans may lead to reduced profitability for Nepalese commercial banks. Regression analysis reinforces these findings, highlighting significantly negative correlations between Return on Assets (ROA), Return on Equity (ROE), and spread with capital adequacy determinants, and a positively insignificant relationship between government securities, total investment, and profitability metrics. Conclusions: The study explored capital adequacy determinants (CAR, D-ER, AAR, G-STIR, NPLR) and their impact on bank profitability in Nepal. CAR had no significant effect on ROA, exhibiting a negative correlation. Conversely, D-ER and Advances-to-Assets Ratio positively influenced ROA. G-STIR showed a positive relationship without significance, while NPLR had a significantly negative impact. Non-risk-weighted measures, particularly debt-equity, negatively affected profitability. The study highlighted the limited impact, suggesting a more nuanced capital management approach, emphasizing D-ER and Advances-to-Assets Ratio. Consideration of macroeconomic factors and a balanced capital structure are crucial for commercial banks in Nepal.

This study examines the factors affecting for the deposit mobilization in Nepalese commercial banks. Return on assets and return on equity are the dependable variables. The selected independent variables are bank size, capital adequacy ratio, credit to deposit ratio, loan loss provision, non-performing loan. The study is based on data of 19 Nepalese commercial banks for the period from 2016/17 to 2021/22. Secondary data are used to extract the information from factors affecting for the deposit mobilization in Nepalese commercial banks. The regression models are estimated to test the significance and importance of factors affecting for the deposit mobilization in Nepalese commercial banks. The study showed that there are negative impact of non-performing loan and capital adequacy ratio on return on equity. It indicates that increase in non-performing loan and capital adequacy ratio leads to decrease in return on equity. Similarly, there are positive impact of non-performing loan and capital adequacy ratio on return on assets. It indicates that increase in non-performing loan and capital adequacy ratio leads to increase in return on assets. The result shows that there is a positive impact of credit to deposit ratio on return on assets and return on equity. It indicates that increase in credit to deposit ratio leads to increase in return on assets and return on equity. Likewise, loan loss provision and bank size have a positive impact on return on equity. It indicates that increase in loan loss provision and bank size leads to increase in return on equity. Similarly, loan loss provision and bank size have a negative impact on return on assets. It indicates that increase in loan loss provision and bank size leads to decrease in return on assets.

To address escalating environmental challenges and the energy crisis, traditional energy companies must initiate green transformations and enhance green innovation. ESG (Environmental, Social, and Governance) performance is vital for gauging enterprises’ sustainable development. Therefore, this study explores the relationship between the ESG performance of traditional energy companies and their extent of green innovation. It aims to investigate whether improving ESG performance can lead to enhanced green innovation within these companies. Therefore, this paper employs a fixed effect model to analyze the impact of ESG performance on green innovation among traditional energy companies, specifically focusing on those listed in the Chinese A-share market from 2013 to 2022. The results indicate that ESG performance significantly promotes green innovation within traditional energy companies. The mechanism test’s findings reveal that ESG performance impacts green innovation via three key pathways: innovation investment, external monitoring, and government subsidies. Furthermore, further analysis reveals that the intense market competition environment positively moderates the effect of ESG performance enhancement on the extent of green innovation. This implies that, by improving their ESG performance, traditional energy companies can enhance their green innovation and green transformation efforts. Moreover, this impact is particularly pronounced among state-owned enterprises.