impact of macroeconomic factors on non-performing loans
THE IMPACT OF MACROECONOMIC FACTORS ON NONPERFORMING LOANS IN THE KENYAN BANKING INDUSTRY.
MAKUSA GEORGE MAWILI
HD 335-40-0284/2012
JOMO KENYATTA UNIVERSITY
OF AGRICULTURE AND TECHNOLGY
Email;mawiligeorge@yahoo.com
Phone No. +254 0728 165 416
Abstract
This study aimed to investigate the effect of macroeconomic factors on the performance of nonperforming loans in the Kenyan commercial Banking industry. The research methodology adopted was a simple time series analysis design that assisted in providing a reliable assessment of the determinants of NPLs in Kenya. The paper employs a number of tests, that is, stationarity of each variable and the residual series from the regression equation, univariate analysis, bivariate analysis to test the correlation and multiple regression analysis to look at the relationship between the dependent and independent variables. Granger causality was also employed to test for possible existence of causality in the data. The impact of gross domestic product (GDP), capital inflows on nonperforming loans in Kenya was found to be negatively related. While CPI was found to have a negative relation in short run and positive relation in long run to NPLs. An increase in M2 leads to decrease in NPLs
Key words -Macroeconomic factors, Nonperforming loans, Kenyan Banking Industry, Error correction model, Granger causality, Cointegration test.
1. Introduction
Given the recent turbulence in banking and the rise in non-performing loans (NPLs) there is renewed interest in the impact of internal and external factors on NPLs of banks. Financial institutions and more specifically the banking industry are faced with an array of risks such as liquidity risk, market risk, and operational risk credit risk among others. Credit risk is identified as one of the major oldest risk factors that banks and other financial institutions have been facing from time to time. Karumba and Wafula (2012) default risk is as a result of the
MAKUSA GEORGE MAWILI
HD 335-40-0284/2012
JOMO KENYATTA UNIVERSITY
OF AGRICULTURE AND TECHNOLGY
Email;mawiligeorge@yahoo.com
Phone No. +254 0728 165 416
Abstract
This study aimed to investigate the effect of macroeconomic factors on the performance of nonperforming loans in the Kenyan commercial Banking industry. The research methodology adopted was a simple time series analysis design that assisted in providing a reliable assessment of the determinants of NPLs in Kenya. The paper employs a number of tests, that is, stationarity of each variable and the residual series from the regression equation, univariate analysis, bivariate analysis to test the correlation and multiple regression analysis to look at the relationship between the dependent and independent variables. Granger causality was also employed to test for possible existence of causality in the data. The impact of gross domestic product (GDP), capital inflows on nonperforming loans in Kenya was found to be negatively related. While CPI was found to have a negative relation in short run and positive relation in long run to NPLs. An increase in M2 leads to decrease in NPLs
Key words -Macroeconomic factors, Nonperforming loans, Kenyan Banking Industry, Error correction model, Granger causality, Cointegration test.
1. Introduction
Given the recent turbulence in banking and the rise in non-performing loans (NPLs) there is renewed interest in the impact of internal and external factors on NPLs of banks. Financial institutions and more specifically the banking industry are faced with an array of risks such as liquidity risk, market risk, and operational risk credit risk among others. Credit risk is identified as one of the major oldest risk factors that banks and other financial institutions have been facing from time to time. Karumba and Wafula (2012) default risk is as a result of the
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