Bank Lending Rates and Nonperforming Loans of Listed Commercial Banks in Kenya

Abstract

The rise in non-performing loans in Kenyan commercial banks over the past ten years has created instability in the financial industry. Due to their impact on borrowers' ability to repay the loans, high-interest rates are a contributing factor to non-performing loans. The interest rate on loans has an implicit cost that is inherent to bank credit and has an impact on loan defaults. In this sense, a large percentage of non-performing loans (NPLs) in Kenya’s Commercial banks has continued to impede economic expansion due to high default rates experienced by many banks making them unable to advance new loans. The study investigated the influence of bank lending rates on nonperforming loans in listed commercial banks in Kenya using secondary monthly data from November 2019 when the interest capping was repelled to September 2023. Secondary data was obtained from the Central Bank of Kenya Monthly Statistical Bulletin. Inferential statistics using regression analysis was utilized to analyze the data. The regression model results showed that bank lending rates had a positive and statistically significant effect on non-performing loans of listed commercial banks in Kenya as illustrated by a P-value of 0.0000000054, which is less than 0.05. The results implied that lending rates do influence non-performing loans of listed commercial banks in Kenya as measured by the gross non-performing loans ratio. Policymakers in Kenya need to control lending rates to reduce the rising rates of non-performing loans.