Moderating Effect of Central Bank of Kenya Regulations Compliance on the Relationship Between Predatory Loan Practices and Loan Performance Among Commercial Banks in Kenya

Abstract

Commercial banks in Kenya play a vital role in the country's financial system. In 2023, Commercial banks contributed approximately 6.6% to Kenya's GDP. They perform a wide range of functions essential to the economy, such as accepting deposits, advancement of loans, payment and settlement services, safekeeping or custodian services, foreign exchange services, and financial advisory services, among others but the most critical function of commercial banks is acting as intermediaries between savers and borrowers, mobilizing savings from individuals and institutions and channelling these funds into productive investments by lending to businesses, governments, and consumers. The primary source of income for commercial banks is interest from performing loans. Non-performing loans arise when the borrowers fail to make the scheduled payments of principal and interest within the agreed time, usually for 90 days. Recent statistics by CBK indicate that the Kenya commercial banks’ gross non-performing loans rose to Kes 630 billion by April 2024, translating to a rise in the ratio of NPLs to Gross Loans from 14.8% in December 2023 to 16.15% by April 2024. The objective of this study was to analyze the moderating effect of Central Bank of Kenya regulations compliance on the relationship between predatory loan practices and loan performance among commercial banks in Kenya. The study applied a post-positivism research philosophy and a mixed research design. The sampling frame and unit of analysis was a list of the 39 solvent commercial banks in Kenya (CBK, 2023). The unit of response was a list of 234 managers of the 39 solvent commercial banks. A closedended questionnaire was used to collect primary data for the predictor and predict and. For triangulation, a secondary data collection sheet was used to collect secondary data for the regress and. The stability and construct validity of instrumentation was assessed using the Cronbach alpha coefficient and Kaiser-Meyer-Olkin coefficients, respectively, using data from managers of the three largest Micro Finance Banks in Kenya and based in Nairobi. After testing the data for Gaussian distribution, linearity, and independence, simple linear regression was used for inferential analysis. The study found a positive but not statistically significant influence of central bank regulations compliance on the relationship between predatory loan practices and loan performance among commercial banks in Kenya. The moderated model explained an additional 0.3% in the variations of loan performance from the un-moderated model of 58.3% to 58.8% after moderation.