MACRO-ECONOMIC INDICATORS AND NON-PERFORMING LOANS OF PUBLIC LISTED COMMERCIAL BANKS ACROSS SECURITIES EXCHANGES IN EAST AFRICA

Abstract

Banks play an important role in the financial system. Through their intermediation activities, banks facilitate the development process of an economy. Therefore, for this critical role to be sustainable, banks need to financially perform satisfactorily to enable them efficiently undertake their intermediation role. However, their performance in the country has been at risk due to rise in non-performing loans (NPLs) in the market. The rise in non-performing loans has led to risk aversion among banks denying ordinary people credit facilities. Numerous studies associate the rise in non-perming loans in banks with various macro-economic factors and monetary policies. These macroeconomic factors that affect a banking system, non-performing loans pose a worrisome threat to the performance of banks and the financial stability of an economy as a whole. This study established the influence of macroeconomic indicators on non-performing loans of public listed commercial banks in East Africa Securities Exchanges. The study analyzed panel dataset of 29 East Africa listed commercial banks with yearly data that spans the period from 2006 to 2020, a total of 435 bank years. The study used a correlational research design and a document review guide to extract and compile the required secondary data for analysis from the financial statements. The findings indicated that interest rate has a positive and significant effect on nonperforming loans. Inflation has a positive but non-significant effect on nonperforming loans. Growth of money supply has a positive and significant relationship on nonperforming loans of public listed commercial banks. Lastly, bank size has a positive and a significant effect on nonperforming loans of public listed commercial banks. The study concluded that interest rate, growth of money supply and bank size had a significant relationship with non-performing loans. However, inflation did not have a significant effect on non-performing loans. The study recommended that the management of the commercial banks should actively monitor and set appropriate lending rate for the loans they issue. This is because the lending rate has a significant effect on non-performing loans. Increase in lending rate means that the non-performing loans increase. Commercial banks should also enhance periodic/regular credit risk monitoring of their loan portfolios to reduce the level of non-performing loans. The study recommended that the commercial banks should come up with policies to control base lending rates to a manageable level even with high inflation rates. Central Bank of Kenya should incorporate the ever-changing operating environment of commercial banks when making changes in the money supply.