EFFECT OF NON-PERFORMING LOANS ON PERFORMANCE OF COMMERCIAL BANKS IN KENYA: A COMPARATIVE STUDY BETWEEN NATIONAL BANK KENYA LIMITED AND EQUITY BANK KENYA LIMITED

Abstract

Banks are essential in circulating currency and wealth of the society and they optimize their liquidity risk by assuming externalities posed by their choices. Kenya’s banking sector has experienced liquidity challenges ranging from funding to market risks. This research focused on the effects of non-performing loans on performance of commercial banks in Kenya. Correlational research design with a comparative analysis approach was adopted. The target population was two commercial banks and document analysis guide was used to gather quantitative data from the banks financial statements through 2007 to 2016 and interview schedule was used to gather primary data from Operations Directors, Chief Finance Officers, Credit Directors and Treasury Directors of the banks. Descriptive statistics showed the trend of the bank’s performance and exposure to Non-performing loans. Pearson correlation was used to show the strength and association among the study variables. Non- performing Loans had (r= -0.194) and a significant negative regression coefficient of -0.473 for Equity bank while for National Bank of Kenya had r= -0.338 and a significant relationship with performance as shown by the regression coefficient of -0.031. The study concluded that Non-performing Loans affect bank performance. Banks should therefore encourage wider information sharing to minimize exposure to credit risk as they improve income generation ability. Further research can be undertaken on the relationship between asset base and bank performance by introducing new variables, longer period and different method of analysis (GEE, GMM, Dynamic panel analysis) among others. Key