Loan Remodelling and Financial Performance of Commercial Banks in Kenya

Abstract

The implementation of loan remodelling for a bank particularly during a pandemic is aimed at providing favourable terms that allow borrowers to repay and enable the banks to avoid high rates of non-performing loans. This study’s general objective was to examine the effect of loan remodelling on the financial performance of commercial banks in Kenya. The theories underpinning the study included Financial Intermediation, Innovation Diffusion, Credit Risk, Modern Portfolio, and Modern Monetary Theory. An explanatory research design was espoused in the study. The 36 commercial banks operating in Kenya constituted the target population. The study used a census approach by collecting data from all the banks operating in Kenya. The study used secondary data from the 2016 to 2021 period drawn from the financial statements of the banks. Data analysis included descriptive and inferential statistics. A panel linear regression model was developed and analysed using STATA. The study findings from the regression analysis showed that digital lending had a positive and significant effect on financial performance (β = 0.0822, p-value = 0.003), loan loss provision had a negative but non-significant effect on banks' profitability (β = -0.0255, p-value = 0.301) while business model adjustment had a positive but a non-significant effect on the financial performance of the banks in Kenya (β = 0.0915, p-value = 0.415) during the period under study. Based on these findings, commercial banks should employ technology and innovate more digital products, especially those that facilitate digital lending to enhance their profitability. Banks should continue provisioning for loan loss in compliance with International Financial Reporting Standards and caution against non-performing loans for the sustainability of their business operation. Banks should continue diversifying their investment portfolio and adjust their business model to a point that it would significantly impact their profitability, by creating more non-interest income opportunities. Finally, the Central Bank of Kenya should continue providing a regulatory framework geared towards facilitating lending and improving the profitability of banks. Keywords: Loan Remodeling, Digital Lending, Loan Loss Provision, Business Model Adjustment, Financial Performance