Effect of Bank Specific Factors on Default Risk among Commercial Banks in Kenya
Abstract
Risk of defaulting has been on the rise globally with nonperforming loans of commercial banks increasing for the last decade. Similar trends are seen locally with commercial banks recording an increase in non-performing loans. The central bank of Kenya supervision annual report indicated that the ratio of non-performing loans to gross loans has tremendously increased. These figures reveal a deteriorating trend in default risk which is not healthy to the performance of the commercial banks and the overall financial adequacy of the economy and therefore provides the impetus for conducting this study. The study therefore sought to determine bank specific factors that influence default risk among commercial banks in Kenya. A descriptive survey design was adopted. The study targeted all the 40 operational commercial banks in Kenya by the year 2018. The study used secondary data extracted from the annual financial reports of the CBK from the year 2013 to the year 2018. The study found that credit growth and interest on loans had a positive and significant effect on default risk among commercial banks in Kenya. However, management efficiency had a negative and insignificant effect on default risk among commercial banks in Kenya. In addition, inflation partially moderated the relationship between bank specific factors and default risk among commercial banks in Kenya. The study concluded that high amount of credit borrowed in a bank led to high non-performing loans. In addition, high interest rates charged by commercial banks causes increase in the non-performing loans. The study recommended that banks should minimize their lending interest rates. This will enable the borrowers to be able to pay the borrowed loan and thus minimize the default risk. Banks should further ensure that their assets and earning are well managed so as to minimize their loan risk.
Keywords: Management efficiency, interest rates, credit growth, inflation, default risk
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