Effect Of Loan Products On Asset Quality Of Commercial Banks In Kenya

Abstract

The lending function is considered as the most important function of any commercial bank, since most of the banks’ earnings are generated from interest income. In the past, large number of non-performing loans had contributed quite significantly to low profits in Kenyan banks. Banks are now reviewing their lending portfolios using the laid down criteria such as credit modeling by Basel Committee on Banking Supervision. This study examined the effect of loan products on asset quality of commercial banks in Kenya. The specific objectives determined the effect of commercial loans, asset financing, vendor financing and real estate loans on asset quality of commercial banks. Agency theory, theory of information asymmetry and Loanable funds Theory informed the study. The study adopted a descriptive research design approach where the target population included the 41 commercial banks for the period 2015-2019. The study used secondary data that was extracted from the websites of the respective commercial banks. The study used panel regression analytical model. This study conducted serial correlation tests, heteroscedasticity tests and multicollinearity test to evaluate the data collected before the actual analysis. The results indicated a positive and significant relationship between commercial loans and the asset quality of commercial banks (β= 0.071, p=0.030). Further, there was a positive and significant relationship between asset financing loans and asset quality of commercial banks (β= 0.144, p= 0.000). Vendor financing loans had a positive and significant relationship with asset quality of commercial banks (β= 0.076, p= 0.025). Lastly, real estate loans revealed a positive and significant relationship with asset quality of commercial banks (β= 0.151, p= 0.000). The study concluded that commercial loans, asset financing, vendor financing and real estate loans affected asset quality of commercial banks in a positive and significant way. The study recommended that the commercial bank should focus on reducing the level of nonperforming loans because when diversifying the loan portfolio where there is a high credit risk. The study recommended that the commercial bank to be sure that the collateral is protected and will not deteriorate, this costs the bank money. Lastly, the study recommended banks should develop comprehensive strategic plans detailing on how they will deal with non-performing loans in their occurrence in a systematic way.”