Effect Of Asset Restructuring On Financial Performance Of Tier Three Commercial Banks In Kenya

Abstract

The study objective aimed at establishing the effect of asset restructuring on tier three commercial banks in Kenya financial performance. Generally, when asset restructuring is employed by the firm‟s management then it should have some effects on the profitability of banks. Therefore, a study was conducted on the tier three commercial banks in Kenya, which is the registered under Central Bank Act and which was in operation during this research period from 2010 to 2019. The ratios that make the variables under consideration on non-performing assets, written off assets, restructured loans and asset assets management level was computed from the data collected and extracted from CBK reports and the respective banks annual financial statements. The data collected from the secondary sources was then cleaned, coded, and analyzed using statistical package for social science. The theories guided the study include gambler‟s ruin theory, free cash flow of cash management theory and the resource-based credit risk modeling theory. The study found out that non-performing loans have a negative and statistically significant effect on the financial performance of tier three commercial banks in Kenya, found that non-performing assets had a statistically positive significant effect on the profitability of tier three commercial banks. The study established that written off assets had a positive and statistically insignificant effect on the profitability of tier three commercial banks in Kenya. The study concluded that financial performance in tier three commercial banks is most likely to be caused by non-performing loans as a variable in asset restructuring. The study recommends that the tier three commercial banks should review their loan criteria and procedures to reduce the cases of default. Additionally, the written off assets criteria needs to examined if the tier three commercial banks are to attain financial stability. The study had a secondary data limitation which was obtained from the supervisory report by the CBK and individual banks audited financial statements. Further, the study recommends that the government should review the liquidity requirements of banks as the liquidity does not help in generating income. The finding of this study will offer insight to fiscally Kenyan distressed banks on the asset restructuring effect in order to enhance the profitability of their financial institutions with an opinion to ensure sustainability in a competitive financial market while meeting their social objective.