EFFECT OF BANK SIZE ON THE LEVEL OF NON-PERFORMING LOANS IN COMMERCIAL BANKS IN KENYA

Nancy Oundo Dalla
Jomo Kenyatta University of Agriculture and Technology (JKUAT)

Dr. Willy Muturi
Jomo Kenyatta University of Agriculture and Technology (JKUAT)

Dr. Patrick Ngumi
Jomo Kenyatta University of Agriculture and Technology (JKUAT)

CITATION: Dalla, O., N., Muturi, W., Ngumi, P. (2016). Effect of Bank Size on The Level of Non-Performing Loans in Commercial Banks in Kenya. International journal of Economics and Finance. Vol. 5 (8) PP 21-32.

ABSTRACT

The general objective of this study was to establish the effect of bank specific factors on the level of non-performing loans in commercial banks in Kenya. Specifically, the study sought to establish the effect bank size on the level of non-performing loans in commercial banks in Kenya. The study used explanatory research design. The target population for the study used all the forty three commercial banks in operation in Kenya as at 31^st December 2014. The sampling frame was the list of all licensed commercial banks in operation as at 31^st December 2014 as listed in the CBK Annual supervisory report of 2014. The study used both primary and secondary data. Primary data was collected by questionnaire in 2016. Annual secondary data was collected for the period 2003-2014 from Central Bank annual supervision reports, The Banking Survey and the commercial banks published financial statements for use in the study. The research was carried out using explanatory research design. The sampling frame for the research will be all the forty three commercial banks licensed by CBK in operation as at 31^st December 2014. A census was used. The data was analyzed to obtain the descriptive and inferential statistics. Multiple panel regression models was used to establish the effect of bank size on NPLs. The conditional tests that was carried out before panel data analysis is carried out was normality test, Durbin Watson test for Autocorrelation and White test for Hetroscadasticity. Correlation analysis established the extent of the relationship.

The study findings indicated that bank size affect the level of non- performing loans. This was evidenced by the responses from the respondents who indicate that the number of the bank’s branches affects the level non-performing loans, a change in the size of the bank’s total assets affects the level of non-performing loans and the size of the bank’s total assets affects the level of non-performing loans.

It was possible to conclude that bank size is deemed to influence the size of NPLs with the big bank expected to have a lower level of NPLs due to the fact that it enjoys economies of scale and has the resources to carry out a thorough assessment. The small bank on the other hand is expected to have a higher level of NPLs.

The study recommended that there is need for commercial banks to adopt various credit risk management’s practices in order to reduce their level of non-performing loans. It further recommended for sustainable and reliable credit database for immediate and quicker use when needed by both large and small size bank.

Key words: Non-Performing Loan, Bank size, Central bank of Kenya, commercial banks of kenya

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