ABSTRACT

The non-performing loans ratio among Kenyan lenders rose to a 10-year high in the third quarter of the year 2018 as commercial banks struggled with loan defaults in a tough economic environment. The rise has mainly been driven by business borrowers and has affected largely banks in tier 2 and 3, a research report by Standard Investment Bank showed. Businesses in the country have struggled with a tough operating environment this year as credit growth ground to a halt on the back of a year-old rate capping law and a prolonged electioneering. The study dependent variable was NPLs while independent variables were capital adequacy, asset quality, management efficiency liquidity management. The target population was all twenty eight commercial banks in Nakuru County as at 31st December 2017. The study adopted census sampling technique to select all twenty eight commercial banks in Nakuru County. The study used both primary data and secondary data through administering structured questionnaires for primary data and secondary data was obtained from the banking survey 2017. The primary data collected was systematically analyzed, edited for completeness, coded then keyed into SPSS version 22 for evaluating descriptive statistical analysis that generated frequency distribution tables and analyzed by use of descriptive statistics to establish relationship between independent variable capital adequacy, asset quality, liquidity management, management efficiency and dependent variable level of NPLs. The secondary data was coded and keyed to STATA to undertake Pearson correlation and multiple regressions to link the equation which described the effect of dependent variable in terms of the independent variable on the regression model. The study employed multiple linear regressions to analyze the significance of the specific independent variables and level of non-performing loans. The finding revealed that there exist a negative and statistically insignificant relationship between capital adequacy and non-performing loans. Equally, there exist a negative and statistically insignificant relationship between liquidity management and non-performing loans. On the other hand, there exist a positive and statistically significant relationship between asset quality and non-performing loans. Similarly, there exist a positive and statistically insignificant relationship between management efficiency and nonperforming loans. Finally, the findings indicated that macroeconomic factors have moderating effect on the relationship between bank regulations and non-performing loans in commercial banks in Nakuru County. It was concluded that asset quality positively influence non-performing loans while management efficiency influence positively the non-performing loans. Similarly, liquidity management exerts a negative influence on non-performing loans. Finally, capital adequacy influence negatively on non-performing loans. The study recommends that Central Bank of Kenya should regularly access lending behavior to ensure compliance with banking regulations to avoid increasing incidences of non-performing loans. In addition, Central Bank of Kenya should closely monitor banks with deteriorating asset quality. Further, Central Bank of Kenya should strictly monitor the economic sector and ensure that banks provide adequate provisions for loans to mitigate risks of default. Furthermore, banks should maintain a good balance on deposits and lending out loans and adhere to regulators decisions about monetary policies. Finally, banks should increase the operational efficiency of operation weakness and improve corporate governance on the sanction of loans and Central Bank of Kenya should focus on managerial performance in order to detect banks with potential increases in non-performing loans.