This document discusses a study on the relationship between credit risk and financial performance of commercial banks in Kenya from 2014-2018. It provides background on credit risk and how it can be measured using non-performing loans, loan loss provisions, and loans and advances. The study found that non-performing loans and loan loss provision had non-significant negative effects on bank profitability, while loans and advances had a significant positive impact. The document reviews relevant literature and theories around credit risk and financial performance.
This document summarizes a study that examined the determinants of commercial bank lending in Ethiopia between 2005-2011. The study tested whether bank size, credit risk, GDP, investment, deposit, interest rate, liquidity ratio, and cash reserve requirements influenced bank lending. It found that bank size, credit risk, GDP, and liquidity ratio had a significant relationship with lending, but deposit, investment, interest rate, and cash reserves did not. The study suggests banks focus on managing credit risk and liquidity to support lending.
Determinants of commercial banks lending evidence from ethiopian commercial b...Alexander Decker
This document summarizes a study that examined the determinants of commercial bank lending in Ethiopia between 2005-2011. The study tested whether bank size, credit risk, GDP, investment, deposit, interest rate, liquidity ratio, and cash reserve requirements influenced bank lending. It found that bank size, credit risk, GDP, and liquidity ratio had a significant relationship with lending, but deposit, investment, interest rate, and cash reserves did not. The study suggests banks focus on managing credit risk and liquidity to support lending.
Credit default, also known as non-performing loan (NPL), refers to a loan where payments of interest and principal are past due by 90 days or more. There are several causes of credit default in banks, including macroeconomic factors, issues related to lending, business-related problems, and factors related to entrepreneurs. Credit default can lead banks to have efficiency problems, a negative relationship between NPLs and performance, and credit crunch situations. Some remedies for banks include proper risk assessment, motivating loan performers, forming recovery agencies, monitoring collaterals, training staff, and balancing risk and return through investment portfolios.
How corporate diversification affects excess value and excess profitabilityAlexander Decker
This document summarizes a study that examined the relationship between excess value and excess profitability among deposit money banks in Nigeria from 1998-2007. The study used regression and correlation analyses of accounting data from 18 sampled banks. The analyses revealed a positive and statistically significant correlation, indicating a relationship between excess value and excess profitability for both diversified and standalone banks. Prior literature on the costs and benefits of corporate diversification was reviewed. The study aimed to measure this relationship for Nigerian banks and hypothesized no significant relationship, which the analyses did not support.
This thesis investigates the determinants of lending behavior among commercial banks in Ethiopia. The author conducted a case study of eight commercial banks over the period of 2001 to 2013. Through a panel data regression analysis, the author found that deposit volume and bank size had a positive and significant impact on loans and advances. Liquidity ratio and interest rate had a negative and significant impact. Cash reserve requirements and inflation rate had a positive impact, though the relationship was unexpected. GDP growth did not have a statistically significant impact. The study suggests commercial banks focus on deposit mobilization to enhance lending.
This document summarizes a study that investigated the determinants of commercial bank lending behavior in Nigeria. The study aimed to test how common factors like deposits, investments, interest rates, reserve requirements, and liquidity ratios affect bank lending. Regression analysis found the model to be significant, with deposits having the greatest impact on lending. The study suggests banks focus on deposit mobilization to enhance lending performance and develop strategic plans.
Causes of Non-Performing Loan: A Study on State Owned Commercial Bank of Bang...Dhaka university
Research Objectives and Possible Research Questions, Classified Loan, Theories: Ethical theory, Moral Hazard, Political Power, Transaction Cost, Stakeholder, Conceptual framework, Research Position, References and Reviewed Literature
This document summarizes a research paper that analyzed the determinants of credit risk in the Indonesian banking industry. Specifically, it examined how bank-specific variables like bank size, profitability, capital adequacy, and ownership structure influence the level of non-performing loans (NPL), which is used as a measure of credit risk. The document reviews several previous studies that also analyzed the relationship between credit risk and bank-specific factors in other countries. It then outlines the methodology that will be used in the research, including the data collection and analysis methods.
This document summarizes a study that examined the determinants of commercial bank lending in Ethiopia between 2005-2011. The study tested whether bank size, credit risk, GDP, investment, deposit, interest rate, liquidity ratio, and cash reserve requirements influenced bank lending. It found that bank size, credit risk, GDP, and liquidity ratio had a significant relationship with lending, but deposit, investment, interest rate, and cash reserves did not. The study suggests banks focus on managing credit risk and liquidity to support lending.
Determinants of commercial banks lending evidence from ethiopian commercial b...Alexander Decker
This document summarizes a study that examined the determinants of commercial bank lending in Ethiopia between 2005-2011. The study tested whether bank size, credit risk, GDP, investment, deposit, interest rate, liquidity ratio, and cash reserve requirements influenced bank lending. It found that bank size, credit risk, GDP, and liquidity ratio had a significant relationship with lending, but deposit, investment, interest rate, and cash reserves did not. The study suggests banks focus on managing credit risk and liquidity to support lending.
Credit default, also known as non-performing loan (NPL), refers to a loan where payments of interest and principal are past due by 90 days or more. There are several causes of credit default in banks, including macroeconomic factors, issues related to lending, business-related problems, and factors related to entrepreneurs. Credit default can lead banks to have efficiency problems, a negative relationship between NPLs and performance, and credit crunch situations. Some remedies for banks include proper risk assessment, motivating loan performers, forming recovery agencies, monitoring collaterals, training staff, and balancing risk and return through investment portfolios.
How corporate diversification affects excess value and excess profitabilityAlexander Decker
This document summarizes a study that examined the relationship between excess value and excess profitability among deposit money banks in Nigeria from 1998-2007. The study used regression and correlation analyses of accounting data from 18 sampled banks. The analyses revealed a positive and statistically significant correlation, indicating a relationship between excess value and excess profitability for both diversified and standalone banks. Prior literature on the costs and benefits of corporate diversification was reviewed. The study aimed to measure this relationship for Nigerian banks and hypothesized no significant relationship, which the analyses did not support.
This thesis investigates the determinants of lending behavior among commercial banks in Ethiopia. The author conducted a case study of eight commercial banks over the period of 2001 to 2013. Through a panel data regression analysis, the author found that deposit volume and bank size had a positive and significant impact on loans and advances. Liquidity ratio and interest rate had a negative and significant impact. Cash reserve requirements and inflation rate had a positive impact, though the relationship was unexpected. GDP growth did not have a statistically significant impact. The study suggests commercial banks focus on deposit mobilization to enhance lending.
This document summarizes a study that investigated the determinants of commercial bank lending behavior in Nigeria. The study aimed to test how common factors like deposits, investments, interest rates, reserve requirements, and liquidity ratios affect bank lending. Regression analysis found the model to be significant, with deposits having the greatest impact on lending. The study suggests banks focus on deposit mobilization to enhance lending performance and develop strategic plans.
Causes of Non-Performing Loan: A Study on State Owned Commercial Bank of Bang...Dhaka university
Research Objectives and Possible Research Questions, Classified Loan, Theories: Ethical theory, Moral Hazard, Political Power, Transaction Cost, Stakeholder, Conceptual framework, Research Position, References and Reviewed Literature
This document summarizes a research paper that analyzed the determinants of credit risk in the Indonesian banking industry. Specifically, it examined how bank-specific variables like bank size, profitability, capital adequacy, and ownership structure influence the level of non-performing loans (NPL), which is used as a measure of credit risk. The document reviews several previous studies that also analyzed the relationship between credit risk and bank-specific factors in other countries. It then outlines the methodology that will be used in the research, including the data collection and analysis methods.
CREDIT QUALITY IN INDIAN BANKING :QUANTITATIVE EVALUATIONDinabandhu Bag
This document summarizes a study examining factors that influence credit quality and non-performing loans in Indian banking. The study finds:
1) Both economic factors and bank-specific factors like capital adequacy ratios and credit deposit ratios influence credit quality and non-performing assets.
2) Analyzing data from 2002-2007 for 17 major Indian banks, the study finds higher capital adequacy ratios and credit deposit ratios are associated with lower non-performing loans.
3) Stronger economic growth, as measured by GDP growth, is also associated with lower non-performing loans for banks. The results provide insights into how banks can maintain better credit quality.
This document discusses empirical research on the determinants of bank lending across countries. It proposes estimating equations to model domestic credit levels based on bank balance sheet and capital requirements approaches. The analysis will use data from 146 countries over 1990-2013 to examine how economic growth, banking system health, and external capital flows influence domestic credit after controlling for other factors. Key determinants expected to impact credit include deposits, interest rates, costs, capital levels, and macroeconomic conditions.
This document summarizes a study that uses a matched sample of individual loans, borrowers, and banks to investigate the effect of banks' financial health on the cost of loans for borrowers, while controlling for borrower risk and information costs. The key findings are:
1) Borrowers pay higher interest rates on loans from low-capital banks compared to well-capitalized banks, even after controlling for borrower risk.
2) This effect is most significant for borrowers where information costs are likely important.
3) When borrowing from weak banks, these high-information-cost borrowers tend to hold more cash, indicating costs to switching lenders.
4) The results provide support for
Empirical analysis of the impact of post merger on nigerian banks profitabilityAlexander Decker
This research examines the impact of post-merger performance on Nigerian banks using data from Access Bank and United Bank for Africa between 2005-2012. The study finds that post-merger performance has not significantly impacted banks' profitability. It recommends that only strong banks merge to form mega-banks to achieve promised synergies, and that unethical banking practices be discouraged. The document provides background on reasons for increasing mergers and acquisitions in Nigeria's banking sector, as well as challenges that can arise from the consolidation process.
The moderating role of bank performance indicators on credit risk of indian p...Alexander Decker
The document analyzes the moderating role of bank performance indicators on the relationship between lending (advances) and credit risk (non-performing assets or NPA) for Indian public sector banks from 2000-2001 to 2011-2012. It finds that bank performance variables like borrowing, investments, reserves, deposits, capital, and total assets moderate the relationship between advances and NPA. Specifically, the study shows that over 90% of the variability in gross NPA for State Bank of India and its associates can be explained when including these bank performance variables and their interaction with advances in the regression model.
The profitability of commercial banks is influenced by a number of internal and external factors. This paper attempts to identify the internal factors which significantly influence the profitability of commercial banks in Bangladesh. In this study, profitability is measured by ROA and ROE which may be significantly influenced by the internal factors such as IRS, NIM, CAR, CR, DG, LD, CTI and SIZE of the bank. Data are collected from published annual reports during 2014--2018 of 23 commercial banks. Using simple regression model, it is found that CR has significant effect on the profitability and CAR has significant influence on ROA only. In addition to this, DG has significant effects on PCBs’ profitability (ROE only) where as IRS and CTI have significant influence on profitability (ROA only) of ICBs. Further, none of these variables have significant effects on the profitability of SCBs but CAR and CR are correlated with profitability (ROA only) and the causes may be the nature of services provided by SCBs to its clients. The internal policy makers should manage the influential internal factors of the banks in order to increase their profitability so that they can meet stakeholders’ expectations.
This document outlines research questions for predicting loan defaults. It asks: (1) Can a model predict charge-offs and what variables influence them? (2) What are average charge-offs per month/year? (3) What are average charge-off amounts? Additional questions examine differences between personal and business loans, characteristics of defaulters, and bank-level factors. Theoretical ideas to explore include income, indebtedness, wealth, interest rates, and fiscal policies. The goal is to understand loan defaults and build predictive models.
Assessing the effect of liquidity on profitability of commercial banks in kenyaAlexander Decker
This document discusses factors that affect the profitability of commercial banks in Kenya. It provides background on the banking sector in Kenya and reviews various theories on factors that influence bank profitability, including market power theory, efficiency structure theory, and the Modigliani-Miller theorem. The study aimed to determine the effect of internal factors like liquidity on the profitability of commercial banks in Kenya. It found that liquidity has a statistically significant and positive relationship with bank profitability.
Evaluating Loan Loss Provisioning for Non-Performing Loans and Its Impact on ...Fakir Tajul Islam
Using the aggregate data of 56 commercial banks in the last 9 years
(2009-2017), this study attempts to evaluate the Impacts of LLP maintained for NPLs on profitability, as it may help
to take the level of the LLP, and NPLs in the optimum level of business success.
The Influence of Solvency Ratio Decision on Rural Bank Dinar Pusaka In The Di...inventionjournals
The solvency ratio is a ratio that can be used to influence lending decisions on the BPR. This research purpose to test and find empirical evidence whether the Debt to Assets Ratio, Times Interest Earned Ratio, and Long-term Debt to Equity Ratio influence on lending decisions. The population useful for customers apply for credit to the BPR Dinar Pusaka in the district Sidoarjo. The sample in this research were selected using purposive sampling method until elected only 30 customers during the three periods, namely the year 2013 to 2015. Data analysis technique used is the logistic regression analysis. The research results show that Times Interest Earned Ratio variable does not affect the lending decisions. Meanwhile, the variable Debt to Assets Ratio and Long-term Debt to Equity Ratio influence on lending decisions
Given the continued poor performance experienced in the banking sector as indicated by high levels of credit risk, poor quality loans and high incidence of non-performing loans, in spite of the frequent reforms that various governments in Nigeria have embarked upon, there is the need to constantly examine and analyse the factors that could affect bank performance with the aim of providing empirical evidence based on which solutions can be proffered. The paper examined the impact of asset quality management on the performance of deposit money banks in Nigeria. The paper adopted the ECM and co-integration techniques using annual aggregate data sourced from the CBN and the NDIC publications for the period 1990-2013. The findings of the study indicate that the selected measures of asset quality have significant impact on all the three indicators of bank performance namely- return on equity, return on total assets and return on shareholders’ fund respectively. In addition, the results of the impulse response and variance decomposition show that own shocks from the performance indicators ROE, ROTA and ROSF account for a greater proportion of the forecast errors of the variables within the ten-year forecast period. In the light of the above, it is recommended that deposit money banks in Nigeria should intensify their efforts in designing and implementing good asset quality management policies in order to further improve on their performance. This can be through human capacity building for personnel in the form of frequent professional training as well as strict adherence to the prudential guidelines.
The document examines the determinants of corporate leverage in Indonesian companies. It analyzes data from 22 companies over the period of 2012-2016 to determine the effects of bond yield, company size, and liquidity on total debt, long-term debt, and short-term debt levels. The analysis uses a random effects regression model. The results show that bond yield has no effect on total debt and short-term debt, while company size and liquidity negatively affect total debt and short-term debt. For long-term debt, bond yield has a positive effect while company size has no effect, and liquidity has a positive effect. In general, the results indicate that leverage patterns in the sample companies are most aligned with short
This document compares the financial performance of ANZ Bank and Commonwealth Bank (CBA) in 2015 based on analysis of their annual reports and key financial ratios. It finds that while CBA outperformed ANZ in terms of profitability, as measured by its higher return on equity ratio of 17.75% compared to ANZ's 14.08%, further analysis of additional financial ratios is needed to understand the drivers of each bank's performance. It analyzes various ratios related to profitability, expenses, assets, interest rates, and efficiency and concludes that overall CBA's performance was better than ANZ's in 2015 due to factors such as higher financial leverage and return on assets as well as better management of earnings and expenses.
052 om c-dhanapal&gganesan-measuring_operational_efficiency_of (1) (1)Anil Aks
This document summarizes a study that measures the operational efficiency of public sector banks in India. It analyzes factors that influence banks' profitability using regression analysis. The study finds that non-performing assets, total income, total expenses, and net interest margin are significant factors. It also uses data envelopment analysis to benchmark the relative efficiency of 21 public sector banks over 5 years. The results show that return on assets, net interest margin, non-performing loans, cost-to-income ratio, advances to deposits ratio, and capital adequacy ratio influence banks' profitability.
8.[77 92]effects and consequences of emphasizing sectoral recovery rate and s...Alexander Decker
This study analyzes how emphasizing sectoral loan recovery rates and the proportion of loans to sectors in Bangladesh Shilpa Bank's (BSB) loan portfolio affects its approval of new project loans. The study tests whether this emphasis sacrifices opportunities in profitable and growing sectors or approves loans to highly leveraged sectors. It analyzes the impacts of focusing on recovery rates and sectoral loan proportions on sector growth, profitability, and debt levels using empirical models. The results indicate the emphasis positively relates to loan approvals but also approves loans to highly leveraged sectors, sacrificing opportunities in more profitable sectors.
This paper empirically examines the impact of bank specific characteristics in determining the Islamic banking profitability in Bangladesh. Research period covers 2010–2017. Research method is a panel analysis. Fixed effects model is applied based on the Hausman test. The study takes return on assets (ROA) as the proxy of profitability. Company specific explanatory variables for the study are bank size, capital-to-risk assets (CRAR), investment-to-deposit (liquidity), non-performing investment (NPI), and cost-to-income. The study finds 4 out of 5 variables statistically significant. However, liquidity slightly misses the significance level. We have found CRAR and cost-to-income are negatively correlated, and liquidity is positively correlated to bank profitability as our expectation. On the other hand, estimation shows a negative correlation between bank size and profitability. Moreover, NPI is found to be positively correlated to ROA because Islamic banking industry’s very low percentage of non-performing investment (3.3%) could not inversely affect the profitability.
11.effects and consequences of emphasizing sectoral recovery rate and sectora...Alexander Decker
This document discusses a study analyzing how emphasizing sectoral loan recovery rates and the proportion of loans to certain sectors in Bangladesh Shilpa Bank's (BSB) loan portfolio affects its approval of new project loans. The study conducts empirical tests to examine if this emphasis sacrifices opportunities in profitable sectors or approves loans to highly leveraged sectors. Regression models are developed and tested using data on sectoral loans, recoveries, and financial information of listed companies. The results found a positive relationship between sectoral recovery rates, loan portfolio proportions, and new project approvals, as well as evidence that loans were approved to high debt sectors.
The purpose of this research was to empirically investigate the effect of capital structure on financial sustainability
of deposit-taking micro finance institutions (DTMs) in Kenya. The specific objectives were to determine the impact
of debt on the financial sustainability of DTMs in Kenya, to assess the influence of retained earnings on the financial
sustainability of DTMs in Kenya, to examine the effect of ordinary share capital on the financial sustainability of
MFIs in Kenya, and to investigate the impact of preferred share capital on the financial sustainability of DTMs in
Kenya. The target population of the study was all the 13 DTMs in Kenya registered with the Central Bank of Kenya.
Secondary data was collected on all the DTMs financial data from the Central Bank of Kenya reports. Data was
analyzed using multiple regression model using SPSS and R as the data analysis tool. Based on the findings 76.9%
of the DTMs did not earn enough revenue to cover the actual financing direct costs, which include the total operating
costs, loan loss provisions and the financing costs but excluding the cost of capital. The analysis of variance
(ANOVA) table indicated that the predictor variables influenced the predictor variable significantly at 5%
significance level. Among the four variables; debt and retained earnings were statistically significant variable at 5%
significance level with 1.265 and 1.630 coefficient respectfully. Whereby the financial sustainability change by
1.265 and 1.630 for every unit change of debt or retained earnings respectfully. Therefore, for the deposit-taking
microfinance institutions to remain afloat in the lending business, they should utilize any borrowing opportunity,
plough back profits to the business, and low proportion of preferred share capital. Deposit-taking microfinance
institutions should avoid usage ordinary share capital as it negatively affected financial sustainability
Non Performing Loan: Impact of Internal and External Factor (Evidence in Indo...inventionjournals
ABSTRACT : Most banks in Indonesia as emerging market still rely on credit as the main income to finance their operations. But not all loans disbursed by banks are free of risk, some of them have a considerable risk and can threaten the health of the bank.NPL levels at Commercial Bank Indonesia over the past five years 1/1/2009-12/31/2013) shows a stable condition. But inversely proportional happen to the 26 Regional Development Banks (BPD), which NPL,since 2011 has continuously increased. It was reaching 3:49 % in June 2014 and was predicted to continue to rise. This study aims to study the influence of internal and external banks factors on the level of non-performing loans (NPL) in the Regional Development Bank (BPD) in Indonesia. This study is a quantitative research using panel data regression analysis with the study period from 2009 to 2013. The object of this study was 26 banks. Factors examined its effect on the NPL is a measure of a bank (SIZE), the capital adequacy ratio (CAR), the level of bank efficiency (ROA), the growth of gross domestic product (GDP), and the rate of inflation. Estimation model used is panel data models Random Effects Model (REM). The results of this study concluded that the level of efficiency of the bank (ROA) has a positive significant effect on NPL. The result of this study clearly warrant future studies.
The aims of the paper are to study the financial performance between the independent finance companies and the
integrated finance companies over the period 2001-2011.
Credit exposure and lending decision quality of private commercial banks in b...Alexander Decker
This document summarizes a research study that examined the level of credit exposure and lending decision quality of local private commercial banks in Bangladesh from 2007-2011. The study used five financial ratios to measure credit performance: non-performing loan to total loan ratio, loan loss reserve to total loan ratio, loan loss reserve to non-performing loan ratio, capital adequacy ratio, and tier 1 capital ratio. An analysis of variance found that the non-performing loan to total loan ratio, loan loss reserve to total loan ratio, and loan loss reserve to non-performing loan ratio differed significantly between conventional and Islamic banks, while the capital adequacy ratio and tier 1 capital ratio did not differ significantly. The study also found an
IMPACT OF CREDIT RISK ON PROFITABILITY A STUDY OF INDIAN PUBLIC SECTOR BANKSJessica Tanner
This document summarizes a research study that examined the impact of credit risk on the profitability of public sector banks in India from 2011 to 2016. The study found:
1) There was a significant positive relationship between return on assets (ROA) and capital adequacy ratio (CAR) and loan provisions to non-performing loans (LPNPL), but a significant negative relationship between ROA and non-performing loans ratio (NPLR).
2) The credit risk variables (CAR, NPLR, LPNPL) predicted 55.7% of the variation in ROA, indicating a significant impact of credit risk on profitability.
3) Among the credit risk indicators, N
CREDIT QUALITY IN INDIAN BANKING :QUANTITATIVE EVALUATIONDinabandhu Bag
This document summarizes a study examining factors that influence credit quality and non-performing loans in Indian banking. The study finds:
1) Both economic factors and bank-specific factors like capital adequacy ratios and credit deposit ratios influence credit quality and non-performing assets.
2) Analyzing data from 2002-2007 for 17 major Indian banks, the study finds higher capital adequacy ratios and credit deposit ratios are associated with lower non-performing loans.
3) Stronger economic growth, as measured by GDP growth, is also associated with lower non-performing loans for banks. The results provide insights into how banks can maintain better credit quality.
This document discusses empirical research on the determinants of bank lending across countries. It proposes estimating equations to model domestic credit levels based on bank balance sheet and capital requirements approaches. The analysis will use data from 146 countries over 1990-2013 to examine how economic growth, banking system health, and external capital flows influence domestic credit after controlling for other factors. Key determinants expected to impact credit include deposits, interest rates, costs, capital levels, and macroeconomic conditions.
This document summarizes a study that uses a matched sample of individual loans, borrowers, and banks to investigate the effect of banks' financial health on the cost of loans for borrowers, while controlling for borrower risk and information costs. The key findings are:
1) Borrowers pay higher interest rates on loans from low-capital banks compared to well-capitalized banks, even after controlling for borrower risk.
2) This effect is most significant for borrowers where information costs are likely important.
3) When borrowing from weak banks, these high-information-cost borrowers tend to hold more cash, indicating costs to switching lenders.
4) The results provide support for
Empirical analysis of the impact of post merger on nigerian banks profitabilityAlexander Decker
This research examines the impact of post-merger performance on Nigerian banks using data from Access Bank and United Bank for Africa between 2005-2012. The study finds that post-merger performance has not significantly impacted banks' profitability. It recommends that only strong banks merge to form mega-banks to achieve promised synergies, and that unethical banking practices be discouraged. The document provides background on reasons for increasing mergers and acquisitions in Nigeria's banking sector, as well as challenges that can arise from the consolidation process.
The moderating role of bank performance indicators on credit risk of indian p...Alexander Decker
The document analyzes the moderating role of bank performance indicators on the relationship between lending (advances) and credit risk (non-performing assets or NPA) for Indian public sector banks from 2000-2001 to 2011-2012. It finds that bank performance variables like borrowing, investments, reserves, deposits, capital, and total assets moderate the relationship between advances and NPA. Specifically, the study shows that over 90% of the variability in gross NPA for State Bank of India and its associates can be explained when including these bank performance variables and their interaction with advances in the regression model.
The profitability of commercial banks is influenced by a number of internal and external factors. This paper attempts to identify the internal factors which significantly influence the profitability of commercial banks in Bangladesh. In this study, profitability is measured by ROA and ROE which may be significantly influenced by the internal factors such as IRS, NIM, CAR, CR, DG, LD, CTI and SIZE of the bank. Data are collected from published annual reports during 2014--2018 of 23 commercial banks. Using simple regression model, it is found that CR has significant effect on the profitability and CAR has significant influence on ROA only. In addition to this, DG has significant effects on PCBs’ profitability (ROE only) where as IRS and CTI have significant influence on profitability (ROA only) of ICBs. Further, none of these variables have significant effects on the profitability of SCBs but CAR and CR are correlated with profitability (ROA only) and the causes may be the nature of services provided by SCBs to its clients. The internal policy makers should manage the influential internal factors of the banks in order to increase their profitability so that they can meet stakeholders’ expectations.
This document outlines research questions for predicting loan defaults. It asks: (1) Can a model predict charge-offs and what variables influence them? (2) What are average charge-offs per month/year? (3) What are average charge-off amounts? Additional questions examine differences between personal and business loans, characteristics of defaulters, and bank-level factors. Theoretical ideas to explore include income, indebtedness, wealth, interest rates, and fiscal policies. The goal is to understand loan defaults and build predictive models.
Assessing the effect of liquidity on profitability of commercial banks in kenyaAlexander Decker
This document discusses factors that affect the profitability of commercial banks in Kenya. It provides background on the banking sector in Kenya and reviews various theories on factors that influence bank profitability, including market power theory, efficiency structure theory, and the Modigliani-Miller theorem. The study aimed to determine the effect of internal factors like liquidity on the profitability of commercial banks in Kenya. It found that liquidity has a statistically significant and positive relationship with bank profitability.
Evaluating Loan Loss Provisioning for Non-Performing Loans and Its Impact on ...Fakir Tajul Islam
Using the aggregate data of 56 commercial banks in the last 9 years
(2009-2017), this study attempts to evaluate the Impacts of LLP maintained for NPLs on profitability, as it may help
to take the level of the LLP, and NPLs in the optimum level of business success.
The Influence of Solvency Ratio Decision on Rural Bank Dinar Pusaka In The Di...inventionjournals
The solvency ratio is a ratio that can be used to influence lending decisions on the BPR. This research purpose to test and find empirical evidence whether the Debt to Assets Ratio, Times Interest Earned Ratio, and Long-term Debt to Equity Ratio influence on lending decisions. The population useful for customers apply for credit to the BPR Dinar Pusaka in the district Sidoarjo. The sample in this research were selected using purposive sampling method until elected only 30 customers during the three periods, namely the year 2013 to 2015. Data analysis technique used is the logistic regression analysis. The research results show that Times Interest Earned Ratio variable does not affect the lending decisions. Meanwhile, the variable Debt to Assets Ratio and Long-term Debt to Equity Ratio influence on lending decisions
Given the continued poor performance experienced in the banking sector as indicated by high levels of credit risk, poor quality loans and high incidence of non-performing loans, in spite of the frequent reforms that various governments in Nigeria have embarked upon, there is the need to constantly examine and analyse the factors that could affect bank performance with the aim of providing empirical evidence based on which solutions can be proffered. The paper examined the impact of asset quality management on the performance of deposit money banks in Nigeria. The paper adopted the ECM and co-integration techniques using annual aggregate data sourced from the CBN and the NDIC publications for the period 1990-2013. The findings of the study indicate that the selected measures of asset quality have significant impact on all the three indicators of bank performance namely- return on equity, return on total assets and return on shareholders’ fund respectively. In addition, the results of the impulse response and variance decomposition show that own shocks from the performance indicators ROE, ROTA and ROSF account for a greater proportion of the forecast errors of the variables within the ten-year forecast period. In the light of the above, it is recommended that deposit money banks in Nigeria should intensify their efforts in designing and implementing good asset quality management policies in order to further improve on their performance. This can be through human capacity building for personnel in the form of frequent professional training as well as strict adherence to the prudential guidelines.
The document examines the determinants of corporate leverage in Indonesian companies. It analyzes data from 22 companies over the period of 2012-2016 to determine the effects of bond yield, company size, and liquidity on total debt, long-term debt, and short-term debt levels. The analysis uses a random effects regression model. The results show that bond yield has no effect on total debt and short-term debt, while company size and liquidity negatively affect total debt and short-term debt. For long-term debt, bond yield has a positive effect while company size has no effect, and liquidity has a positive effect. In general, the results indicate that leverage patterns in the sample companies are most aligned with short
This document compares the financial performance of ANZ Bank and Commonwealth Bank (CBA) in 2015 based on analysis of their annual reports and key financial ratios. It finds that while CBA outperformed ANZ in terms of profitability, as measured by its higher return on equity ratio of 17.75% compared to ANZ's 14.08%, further analysis of additional financial ratios is needed to understand the drivers of each bank's performance. It analyzes various ratios related to profitability, expenses, assets, interest rates, and efficiency and concludes that overall CBA's performance was better than ANZ's in 2015 due to factors such as higher financial leverage and return on assets as well as better management of earnings and expenses.
052 om c-dhanapal&gganesan-measuring_operational_efficiency_of (1) (1)Anil Aks
This document summarizes a study that measures the operational efficiency of public sector banks in India. It analyzes factors that influence banks' profitability using regression analysis. The study finds that non-performing assets, total income, total expenses, and net interest margin are significant factors. It also uses data envelopment analysis to benchmark the relative efficiency of 21 public sector banks over 5 years. The results show that return on assets, net interest margin, non-performing loans, cost-to-income ratio, advances to deposits ratio, and capital adequacy ratio influence banks' profitability.
8.[77 92]effects and consequences of emphasizing sectoral recovery rate and s...Alexander Decker
This study analyzes how emphasizing sectoral loan recovery rates and the proportion of loans to sectors in Bangladesh Shilpa Bank's (BSB) loan portfolio affects its approval of new project loans. The study tests whether this emphasis sacrifices opportunities in profitable and growing sectors or approves loans to highly leveraged sectors. It analyzes the impacts of focusing on recovery rates and sectoral loan proportions on sector growth, profitability, and debt levels using empirical models. The results indicate the emphasis positively relates to loan approvals but also approves loans to highly leveraged sectors, sacrificing opportunities in more profitable sectors.
This paper empirically examines the impact of bank specific characteristics in determining the Islamic banking profitability in Bangladesh. Research period covers 2010–2017. Research method is a panel analysis. Fixed effects model is applied based on the Hausman test. The study takes return on assets (ROA) as the proxy of profitability. Company specific explanatory variables for the study are bank size, capital-to-risk assets (CRAR), investment-to-deposit (liquidity), non-performing investment (NPI), and cost-to-income. The study finds 4 out of 5 variables statistically significant. However, liquidity slightly misses the significance level. We have found CRAR and cost-to-income are negatively correlated, and liquidity is positively correlated to bank profitability as our expectation. On the other hand, estimation shows a negative correlation between bank size and profitability. Moreover, NPI is found to be positively correlated to ROA because Islamic banking industry’s very low percentage of non-performing investment (3.3%) could not inversely affect the profitability.
11.effects and consequences of emphasizing sectoral recovery rate and sectora...Alexander Decker
This document discusses a study analyzing how emphasizing sectoral loan recovery rates and the proportion of loans to certain sectors in Bangladesh Shilpa Bank's (BSB) loan portfolio affects its approval of new project loans. The study conducts empirical tests to examine if this emphasis sacrifices opportunities in profitable sectors or approves loans to highly leveraged sectors. Regression models are developed and tested using data on sectoral loans, recoveries, and financial information of listed companies. The results found a positive relationship between sectoral recovery rates, loan portfolio proportions, and new project approvals, as well as evidence that loans were approved to high debt sectors.
The purpose of this research was to empirically investigate the effect of capital structure on financial sustainability
of deposit-taking micro finance institutions (DTMs) in Kenya. The specific objectives were to determine the impact
of debt on the financial sustainability of DTMs in Kenya, to assess the influence of retained earnings on the financial
sustainability of DTMs in Kenya, to examine the effect of ordinary share capital on the financial sustainability of
MFIs in Kenya, and to investigate the impact of preferred share capital on the financial sustainability of DTMs in
Kenya. The target population of the study was all the 13 DTMs in Kenya registered with the Central Bank of Kenya.
Secondary data was collected on all the DTMs financial data from the Central Bank of Kenya reports. Data was
analyzed using multiple regression model using SPSS and R as the data analysis tool. Based on the findings 76.9%
of the DTMs did not earn enough revenue to cover the actual financing direct costs, which include the total operating
costs, loan loss provisions and the financing costs but excluding the cost of capital. The analysis of variance
(ANOVA) table indicated that the predictor variables influenced the predictor variable significantly at 5%
significance level. Among the four variables; debt and retained earnings were statistically significant variable at 5%
significance level with 1.265 and 1.630 coefficient respectfully. Whereby the financial sustainability change by
1.265 and 1.630 for every unit change of debt or retained earnings respectfully. Therefore, for the deposit-taking
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Non Performing Loan: Impact of Internal and External Factor (Evidence in Indo...inventionjournals
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The aims of the paper are to study the financial performance between the independent finance companies and the
integrated finance companies over the period 2001-2011.
Credit exposure and lending decision quality of private commercial banks in b...Alexander Decker
This document summarizes a research study that examined the level of credit exposure and lending decision quality of local private commercial banks in Bangladesh from 2007-2011. The study used five financial ratios to measure credit performance: non-performing loan to total loan ratio, loan loss reserve to total loan ratio, loan loss reserve to non-performing loan ratio, capital adequacy ratio, and tier 1 capital ratio. An analysis of variance found that the non-performing loan to total loan ratio, loan loss reserve to total loan ratio, and loan loss reserve to non-performing loan ratio differed significantly between conventional and Islamic banks, while the capital adequacy ratio and tier 1 capital ratio did not differ significantly. The study also found an
IMPACT OF CREDIT RISK ON PROFITABILITY A STUDY OF INDIAN PUBLIC SECTOR BANKSJessica Tanner
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2) The credit risk variables (CAR, NPLR, LPNPL) predicted 55.7% of the variation in ROA, indicating a significant impact of credit risk on profitability.
3) Among the credit risk indicators, N
1 efficacy-of-credit-risk-management and profitabilityMisker Bizuayehu
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Relationship between Risk Committee Existence and Financial Performance of Co...Dr. Amarjeet Singh
Performance of some banks in Kenya has been
declining leading to their collapse or receivership. This may be
attributed to many factors such as risk exposure. In bid to
protect the financial sector, Central Bank of Kenya therefore
directed all the banks to manage risks. One of the mechanisms
used by the banks to manage risks is risk committee. Some
banks established risk committees while others did not. There
is limited knowledge on the relationship between this risks
committee and financial performance in commercial banks.
This study therefore aimed at determining the relationship
between risk committee existence and financial performance
of commercial banks. The target population was all
commercial banks operating in Kenya. The study adopted
longitudinal research design that covered a period of five
years (2013- 2017). The study used secondary data extracted
from annual consolidated and financial reports. Information
on specific financial performance indicator was RoA (return
on assets) and risk committee existence was extracted from
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regression analysis. The study found that there is a significant
positive relationship between risk committee existence and
financial performance where the coefficient was r=0.299. The
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by risk committee existence. From the results, it is evident that
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relationship. The study recommends that commercial banks
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Credit Risk and Bank Performance in Nigeriaiosrjce
This study investigates the impact of credit risk on banks’ performance in Nigeria. A panel
estimation of six banks from 2000 to 2013 was done using the random effect model framework. Our findings
show that credit risk is negatively and significantly related to bank performance, measured by return on assets
(ROA). This suggests that an increased exposure to credit risk reduces bank profitability. We also found that
total loan has a positive and significant impact on bank performance. Therefore, to stem the cyclical nature of
non-performing loans and increase their profits, the banks should adopt an aggressive deposit mobilization to
increase credit availability and develop a reliable credit risk management strategy with adequate punishment
for loan payment defaults
This document summarizes a journal article that examines the effects of financial risk management on the financial performance of Kenya Power, with an emphasis on credit risk. It finds that credit risk management has a significant effect on Kenya Power's profitability and liquidity. The study concludes that practicing credit risk management is essential for organizations wanting a positive financial performance. It recommends that Kenya Power focus more effort on minimizing equipment vandalism to further improve its financial results.
RETURN ON EQUITY (ROE) AS MEDIATION OF BANK'S CAPITAL ADEQUATION RATIO (CAR)indexPub
Banks need to maintain their performance and the level of Capital Adequasi Ratio (CAR). This study wants to see the variables that affect the Capital Adequasi Ratio (CAR) and see ROE as a variable that mediates the Capital Adequasi Ratio (CAR) at Bank Rakyat Indonesia (BRI). The research method used multiple regression analysis, t-test, Anova test and Coefficient of Determination and the research period for 14 years from 2009 to 2022, by using SPSS Software version 26. The conclusion of the study, only the BOPO variable has a significant effect on the Capital Adequasi Ratio (CAR) and the ROE variable as a variable that can mediate the CAR variable at Bank Rakyat Indonesia (BRI). Keywords: Capital Adequasi Ratio, Bank Financial Ratio.
Determinants of Banks’ Financial Performance: A Comparative Study between Nat...inventionjournals
Financial performance is one of the most critical factors having impact on the decision making of the resource providers. And thus to ensure the existence in the ever growing competitive business environment, every institution should be more concerned about the factors affecting their financial performance. This paper specially focuses on identifying the factors having impact on the financial performance of the commercial banks operating in Bangladesh. An effort has also been exerted to determine whether the extent of influence of various factors on financial performance varies with respect to local private and nationalized commercial banks. For this purpose 10 local private commercial banks (PCB) and all nationalized commercial banks (NCB) have been taken covering the period from 2008-2014. Here, data has been collected from the annual reports of the banks under consideration. To draw conclusion a multiple regression has been run by considering financial performance (profitability) as dependent variable and operating efficiency, asset utilization , liquidity, credit risk, capital adequacy and size of the company as independent variables. The study finds that asset utilization and operating efficiency have significant positive impact on banks' financial performance (profitability) whereas credit risk has significant negative impact. However, for PCBs asset utilization is the most critical factor to performance. On the other hand, result shows that in case of NCB 1 taka increase in credit risk is responsible for negative return of 0.968 taka. It is found that financial performance has no significant relationship with size and liquidity of the banks
Effect of Credit Risk Management Practices on Profitability of Listed Commerc...iosrjce
The study sought to analyze the effect of credit risk management practices on profitability of listed
commercial banks at Nairobi Security Exchange in Kenya. A descriptive research design was adopted. The
population comprised of listed commerical banks where a sample of 55 employees was purposively sampled. It
was established that credit appraisal practices had a significant positive effect on profitability and that it
explained 14.4% of the variations in profitability. The results also found that credit monitoring had a
significative positive effect on profitability and that 47.8% of the variance in profitability. The findings further,
indicated that debt collection practices had a positive and significant relationship and explained 17.4% of the
variations in profitability. Lastly, the results indicated that credit risk governance had a positive and significant
effect on profitability. Based on the study findings the study concluded that credit appraisal, debt collection and
credit risk governance have a significant positive effect on profitability. It is thus recommended that commercial
banks should have stringent credit appraisal and debt collection policies, credit personnel at all levels must
work in co-ordination in order to ensure that credit is collected in a timely manner and banks should also adopt
credit risk governance frameworks which can be attained by making the process of interaction between senior
management and the Board more effective
A Comparative Analysis of Capital Structure between Banking and Non-Banking F...iosrjce
This document analyzes the capital structure and performance of banking and non-banking financial institutions in Bangladesh from 2009-2013. It uses annual reports from 10 commercial banks and 10 non-bank financial institutions to measure capital structure using debt to equity and debt to assets ratios, and performance using return on equity, return on assets, and earnings per share. Descriptive statistics and t-tests are used to compare differences between the banking and non-banking sectors. The results show no significant difference in earnings per share, but significant differences in debt to assets ratio, debt to equity ratio, return on assets, and return on equity between banks and non-banks.
Financial Risk, Capital Adequacy and Liquidity Performance of Deposit Money B...ijtsrd
The objective of this study was to examine the effect of financial risk on liquidity performance of Deposit Money Banks DMBs in Nigeria, with capital adequacy as a moderator. The study specifically examined the mediating role of capital adequacy on the effect of operational risk, market risk and credit risk on liquidity performance. The study adopted the ex post facto research design as the goal was not to manipulate any variable but rather to establish effect and mediation. The population comprised listed Deposit Money Banks and the sample restricted to a purposive sample of ten 10 banks whose annual reports were accessible for the period of 13 years from 2010 2022 which was the time scope of this study. The data were analysed using structural equation model. The study found that capital adequacy does not significantly mediate the effect of operational, market and credit risks on liquidity performance. Based on these findings, the study recommended that Banks need to create a capital adequacy mechanism necessary for hedging against operating risks inherent in the financial market Banks need to develop a capital adequacy framework to guide them to optimally disclose their market risks, enhance the quality of their disclosure practices, improve the quality of their financial reports and more efficiently manage their liquidity The Nigerian Central Bank need to develop a statutory requirement that will demand a certain level of capital adequacy by the banks before granting a certain level of credit. Odinaka Frank Igbojindu | Gloria Ogochukwu Okafor | Chinedu Jonathan Ndubuisi "Financial Risk, Capital Adequacy and Liquidity Performance of Deposit Money Banks in Nigeria" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-8 | Issue-1 , February 2024, URL: https://www.ijtsrd.com/papers/ijtsrd61356.pdf Paper Url: https://www.ijtsrd.com/management/accounting-and-finance/61356/financial-risk-capital-adequacy-and-liquidity-performance-of-deposit-money-banks-in-nigeria/odinaka-frank-igbojindu
This document examines the determinants of commercial bank profitability in Nigeria from 2000-2013 using panel data regression. It finds that asset quality, management efficiency, and economic growth are statistically significant determinants of profitability. Asset quality, in particular, is highly significant, concluding that credit risk is a major determinant of bank profitability. The study aims to assist bank regulators and managers in Nigeria to better understand factors influencing profitability and improve policies. It reviews theories and prior empirical research on determinants of bank profitability, such as capital adequacy, asset composition, regulation, and ownership structure.
The impact of Non-performing Loans and Bank Performance in Nigeriainventionjournals
This study investigated the relationship between non-performing loans and bank performance in Nigeria for the period 1994-2014. The study employed ADF Unit Root test, descriptive statistics, and multiple regression techniques to analyze data collected for the study from the CBN, NDIC and annual reports of listed banks. The results of the study show that BAL and DOL had statistically negative significant influence on ROCE, while SUL had statistically negative insignificant impact on ROCE. These results show that high level of non-performing loans would reduce the performance of banks in the long run in Nigeria. The study therefore recommended that credit reporting agencies and supervising authorities should be strengthen in order to reduce the high level of non-performing loans in the banking sector of Nigeria.
Effect of Liquidity Risk on Performance of Deposit Money Banks in Nigeriaijtsrd
This study examines the effect of the credit risk ratio on the financial performance of deposit money banks in Nigeria. Ex Post Facto research design was employed for the study. Sample sizes of five banks were selected from twenty banks quoted on the Nigerian Stock Exchange. Data were extracted from annual reports and accounts of the selected banks from 2010 to 2019. Using E view statistical tool to test the hypothesis, the study found that credit risk ratio significantly influences the financial performance of quoted deposit money banks in Nigeria It was recommended that bank managers should constantly engage in rigorous credit analysis, checking, default rate, the proportion of non performing loans, regularly or at least quarterly to enable them to maintain high asset quality to enhance the financial performance. Oraka, Azubike O | Ebubechukwu, Jacinta O "Effect of Liquidity Risk on Performance of Deposit Money Banks in Nigeria" Published in International Journal of Trend in Scientific Research and Development (ijtsrd), ISSN: 2456-6470, Volume-5 | Issue-4 , June 2021, URL: https://www.ijtsrd.compapers/ijtsrd42388.pdf Paper URL: https://www.ijtsrd.commanagement/other/42388/effect-of-liquidity-risk-on-performance-of-deposit-money-banks-in-nigeria/oraka-azubike-o
This document summarizes a research paper that assesses the factors contributing to non-performing loans in Kenyan banks. It discusses how non-performing loans negatively impact bank profitability, liquidity, and stability. It outlines the research objectives, which are to identify the key factors leading to bad loans in Kenya, establish the effects of non-performing loans on banks, analyze trends in bad loans before and after the introduction of credit reference bureaus, and determine efforts to reduce risks from non-performing assets. The significance of studying non-performing loans for policymakers, banks, and future research is also mentioned.
This document outlines a research proposal that examines the relationship between bank governance, financial disclosure, and bank sustainability in Ghana and South Africa. The proposal consists of 7 sections that describe the background and problem statement, objectives, research questions, methodology, significance, and limitations of the study. Specifically, the study aims to investigate how bank governance and financial disclosure relate to bank sustainability, as well as their interactive effects, using annual data from commercial banks in Ghana and South Africa from 2012 to 2022. The findings could provide insights for regulators, banks, and researchers regarding governance and transparency practices.
This document summarizes a study that empirically investigated the relationship between liquidity and profitability in Nigerian commercial banks. The study used secondary data from 10 years of annual reports of First Bank Nigeria PLC, the oldest and largest bank. Regression analysis found a very high correlation between liquidity and profitability, showing that liquidity is a determining factor in bank profitability. It was recommended that monetary authorities boost bank liquidity to increase loanable funds and profit, and that banks improve liquidity management to prevent insolvency.
This study investigated loans default (problems loans) and returns on assets in Nigeria banks, employing the data of five banks for a period of five years (2010-2014), using the ordinary least squares (OLS) regression techniques to check the relationship between problem loans and returns on assets (ROA). The findings shows that a positive and significant relationship at 5% level of significance exist between problem loans and returns on assets, and a negative and significant relationship at 10% level of significance exists between loans and advances and returns on assets in Nigerian banks. A major suggestion is that banks in Nigeria should enhance their capacity in credit analysis and loan administration, while the regulatory authority should pay more attention to banks’ compliance to relevant provisions of Bank and other Financial Institutions Act (1991) and prudential guidelines.
This document summarizes a research study that examined the influence of firm size on the financial performance of deposit money banks quoted on the Nigerian stock exchange from 2005 to 2016. The study used a sample of 5 banks and measured firm size as the log of total assets and financial performance as return on assets. Descriptive statistics and correlation analysis were conducted. The results of the regression analyses showed that firm size had an insignificant negative influence on financial performance, indicating diseconomies of scale. The study recommends that banks minimize expansion costs and maximize economies of scale to stimulate financial performance.
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Credit Risk and Financial Performance of Commercial Banks in Kenya
1. International Journal of Scientific and Research Publications, Volume 10, Issue 4, April 2020 448
ISSN 2250-3153
http://dx.doi.org/10.29322/IJSRP.10.04.2020.p10051 www.ijsrp.org
Credit Risk and Financial Performance of Commercial
Banks in Kenya
Robert Mironga Siriba
Department of Accounting and Finance, University of Nairobi
DOI: 10.29322/IJSRP.10.04.2020.p10051
http://dx.doi.org/10.29322/IJSRP.10.04.2020.p10051
Abstract- Globally, credit risk is one of the significant concerns to banks, and, therefore, these institutions spend a substantial amount
of money on managing it with a view of maximizing returns. Financial performance is a very crucial aspect for any institution since
the majority of stakeholders use it as a parameter to gauge its viability. This research is anchored on credit risk theory, which
postulates that credit risk is negatively related to the financial performance of a firm. The purpose of this study was to investigate the
effect of credit risk on commercial banks’ performance in Kenya for five years (2014-2018). The study used secondary data from the
respective banks’ annual financial statements. Descriptive statistics, such as mean and standard deviation, were used to explain the
characteristics of the study variables. Also, a multiple regression method was used to examine the effect of credit risk on the banks’
performance. It was found that non-performing loans and loan loss provision had non-significant negative effects on the banks’
profitability with p=0.394 and p=0.653, respectively. The research also unveiled that loans and advances (LA) had a significant
positive impact on commercial banks’ profitability (p=0.001). Based on the study findings, commercial banks should be keen on
clients’ appraisal and loan analysis to mitigate credit risks.
Index Terms- Commercial banks, Credit risk, secondary data, performance
1. INTRODUCTION
Commercial banks play a critical role in developing the economy of a country, even though their performance is affected by both
intrinsic and extrinsic factors (Karim & Alam, 2013). Credit risk is one of the banks’ idiosyncratic determinants affecting their
performance, and it can be defined as the likelihood that the borrowers might fail to pay the loans (Yesmine, Saif, & Bhuiyah, 2015).
Banks with higher loan volume and lower credit risk perform better than those without (Mauricio, Moya, & Arturo, 2014). According
to Ally (2014), asset quality, which is measured by the ratio of non-performing loans (NPL) to total loans (TL), has a significant
adverse effect on the banks’ performance.
Kolapo, Ayeni, and Oke (2012) opine that credit risk can be evaluated using loan loss provision (LLP), non-performing loans (NPL),
and loans and advances (LA). Sound credit risk management can reduce loan default and increase commercial banks’ performance.
To enhance higher profitability, banks need to institute loan administration strategies, such as utilizing credit information bureaus
before deciding whether to approve or decline loan requests (Ogboi & Unuafe, 2013).
The presence of a high level of nonperforming loans means that there is poor management of credit in the bank (Ally, 2014). NPL
reduces interest income and leads to loan loss provisioning, hence reducing the banks’ profitability. Commercial banks tend to be
profitable when they enhance their lending activities. To mitigate the continuous growth of NPLs, banks must be keen on credit
analysis, and the regulatory authorities must ensure that all the financial institutions comply with provisions of the prudential
guidelines (Kolapo et al., 2012).
Loan loss provision can be reduced through efficient credit risk management techniques, strict credit policies, and restructuring of
non-performing loans (Alexiou & Sofoklis, 2009). Moreover, credit managers should enhance their recovery efforts on non-
performing assets to boost the profitability of their financial institutions (Nahang & Araghi, 2013).
Sometimes, a positive association is experienced between credit risk and banks’ profitability in instances where the financiers charge
high-interest rates and fees on their credit customers (Boahene, Dasah, & Agyei, 2012). Kaaya and Pastory (2013) argued that credit
risk is not a bad situation because it is a reflection of the banks’ portfolio growth, hence the higher the risk, the higher the return.
Further to this, the authors opined that banks ought to maintain the capital reserve and adopt a sound mechanism to manage and
reduce default.
2. International Journal of Scientific and Research Publications, Volume 10, Issue 4, April 2020 449
ISSN 2250-3153
http://dx.doi.org/10.29322/IJSRP.10.04.2020.p10051 www.ijsrp.org
Non-performing are costly to recover; hence they affect the profitability, liquidity, and the normal operations of the banks’ activities
(Almekhlafi, Almekhlafi, Kargbo, & Hu, 2016). According to Căpraru and Ihnatov (2014), credit risk hurts the growth of financial
institutions, and this trend can be reversed if the banks’ management adopts efficient monitoring of loan indicators to optimize costs.
Moreover, quite often, there is a strong inverse relationship between credit risk and profitability of the banks; hence loan officers
should adopt the best practices of managing these risks to enhance the institutions’ performance (Ramadan, Kilani, & Kaddumi,
2011).
In Kenya, research shows that a change in banking risk has a significant effect on financial institutions’ performance (Lukorito,
Muturi, Nyang’au, & Nyamasege, 2014). Olweny and Shipho (2011) argue that banks specific factors, such as credit risk, significantly
influence profitability more than the market factors. Study shows that banks with high-quality asset portfolios and low NPLs perform
better than others (Ongore & Kusa, 2013). According to CBK’s prudential guidelines, loan loss provisioning is essential for all
classifications, and commercial banks must provide for 20%, 100%, and 100% for Substandard, Doubtful, and Loss, respectively
(CBK, 2013).
For quite sometimes, the majority of banks in Kenya have been recording poor performance due to a high level of NPLs in their asset
portfolios. For instance, a report by CBK (2019) indicates that the ratio of gross NPLs increased from 12.03% in 2018 to 12.78% in
2019, and this increment negatively affected the profitability of these institutions.
Although many studies have been conducted on the impact of credit risk on banks’ performance, their findings are still inconsistent.
For example, Yesmine et al. (2015) and Kolapo (2012) found that a rise in LLP led to the deterioration in banks’ performance. On the
contrary, similar studies by Boahene et al. (2012) and Tariq, Usman, Mir, Aman, and Ali (2014) unveiled that loan loss provision had
a positive effect on commercial banks’ performance. Furthermore, there is little research on the impact of credit risk on banks’
performance in Kenya. Therefore, the current study seeks to bridge these gaps.
The rest of the paper is organized as follows: Section 2 presents literature reviews, section 3 is about research methodologies, section
4 highlights the findings and discussion, and section 5 gives the conclusion and recommendation of the study.
2. LITERATURE REVIEW
This section entails the theoretical review, conceptual framework, and an overview of past studies on the effect of credit risk on the
financial performance of commercial banks in Kenya.
2.1 Theoretical Review
This study is anchored on the Credit Risk Theory, as explained below.
2.1.1 Credit Risk Theory
Merton (1974) opined that there is a relationship between credit risk and the capital structure of the firm. According to Merton, a
company is considered to default if its asset value is less than its outstanding debt. In such circumstances, the lenders are paid an
amount equivalent to the asset, and the shareholders get nil. Therefore, according to this theory, credit risk has an adverse effect on the
profitability of a firm. In another study, it was postulated that a financial asset is prone to credit risk not only at maturity but
throughout its lifetime (Longstaff & Schwartz, 1995).
In their research on credit risk and financial performance of banks, Kajirwa and Katherine (2019) found a significant negative
association between credit risk and banks’ ROE, hence confirming the theory. They further noted that an increase of NPL to total LA
reduced the banks’ financial performance. Similarly, Almekhlafi et al. (2016) established that NPL had a significant negative impact
on performance, thus consistent with the theory. However, some studies are not in line with this theory. For instance, Ogboi and
Unuafe (2013) found out that LLP positively affected performance and Boahene et al. (2012) unveiled that credit risk and banks’
performance had a positive-significant relationship.
2.2 Credit Risk and Financial Performance
This section dives into various aspects that constitute credit risk, e.g., NPLs, LLP, and LA.
3. International Journal of Scientific and Research Publications, Volume 10, Issue 4, April 2020 450
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2.2.1 Non-Performing Loans and Financial Performance
NPLs are assets that have not been paid for at least ninety days (CBK, 2013). Studies show that NPLs have an adverse impact on
banks’ performance, and, therefore, for these institutions to enhance their profitability, they must adopt sound risk management
approaches and strict lending policies (Alexiou & Sofoklis, 2009; Million, Matewos, & Sujata, 2015; Nasserinia, Ariff, & Fah-Fan,
2014). However, some studies reveal that NPLs have a positive relationship with commercial banks’ profitability (Boahene et al.,
2012; Naceur & Omran, 2011; Weersainghe & Perera, 2013). Therefore, based on the inconsistent findings on the impact of NPLs on
banks’ performance, it is hypothesized that:
H1. There is no significant effect of NPLs on the performance of commercial banks in Kenya.
2.2.2 Loan Loss provision and Financial Performance
Loan loss provision is the amount of money that reduces the magnitude of bad loans to the corresponding amount on the balance sheet
(CBK, 2013). According to the CBK’s prudential guideline, banks should make a 20% provision for substandard loans and 100%
provision for loans in doubtful and loss categories. Basel Committee on Banking Supervision (BCBS) (2001) recommended that banks
should always identify bad credits to determine the extent of making loan-loss provisions. Research indicates that LLP has a
significant negative effect on banks’ performance (Kaaya & Pastory, 2013; Samad, 2015). On the contrary, some studies show a
positive association between LLP and the banks’ profitability (Ogboi & Unuafe, 2013; Tariq et al., 2014). Due to such mixed findings,
it is postulated that:
H2. There is no significant effect of LLP on the performance of commercial banks in Kenya.
2.2.3 Loans and Advances and Financial Performance
Loans and advances are financial assets derived from the delivery of cash by a lender to a borrower in exchange for a promise to pay
on a specific date, usually with interest (CBK, 2013). Based on BCBS (2001), loans constitute a bulk of the banks’ asset, and if credit
risk is mitigated, their profitability will increase. Almekhlafi et al. (2016) argue that although loans are riskier assets, they form a
significant part of the banks’ revenue. Kolapo, Ayeni, and Oke (2012) noted that credit facilities are significant determinants of banks’
profitability; hence bank officers should adopt prudent credit analysis in their quest to grow their loan portfolios. This study
hypothesizes that:
H3. There is no significant effect of LA on the performance of commercial banks in Kenya.
2.2.4 Financial Performance
In this study, Return on Equity (ROE) was used as a proxy to evaluate the financial performance of banks for five years. ROE can be
derived by evaluating the ratio of net income to total shareholders’ equity. ROE shows the extent of efficiency of managers in using
assets to generate income (Lan, 2012).
Empirical Review
Kolapo et al. (2012) examined the effect of credit risk on commercial banks’ performance in Nigeria. They collected data from five
banks’ financial statements for eleven years. Their findings indicated that a 100% rise in NPLs reduced performance (ROA) by 6.2%
and a 100% increase in LA enhanced performance by 9.6%. Yesmine et al. (2015) studied the elements of banks’ financial
performance by comparatively analyzing the national and private banks in Bangladesh for the period 2008-2014. Their findings
unveiled that credit risk had a significant adverse effect on the banks’ performance. Finally, they concluded that a rise in the ratio of
LLP to total loans reflected poor credit management and deterioration in profitability. One weakness in their research is that they
didn’t incorporate foreign commercial banks as part of their sample.
Alexiou and Sofoklis (2009) studied the determinants of the Greek banking sector’s performance over the period 2000-2007. Their
study established that credit risk had a significant negative impact on banks’ performance. The study observed that banks in Greece
had a higher level of NPLs than those in the EU, and drastic measures were needed to combat the situation. For the banks to enhance
their profitability, the study recommended the adoption of excellent risk management strategies, strict credit policies, and the
restructuring of NPLs.
Kaaya and Pastory (2013) investigated the impact of credit risk on the profitability of eleven banks in Tanzania. From their research, it
was found that credit risk had a negative impact on the performance of banks. However, the effect of NPLs on the banks’ performance
wasn’t significant. Almekhlafi et al. (2016) examined the impact of credit risk on banks’ performance in Yemen for 1998-2013. In
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their study, secondary data was used to explore the performance of six banks. The findings from their research indicated that NPLs
negatively affected return on assets (ROA). Moreover, the effect of credit risk management on performance was found to be similar
across banks in Yemen.
By using the panel data for 2000-2010, Ramadan (2011) investigated the causes of Islamic banks’ performance in the Jordanian
market. From their results, credit risk had a significant positive effect on the institutions’ returns. Furthermore, their study unveiled
that the impact of banks’ specific factors on performance was significantly different among the Islamic banks. A survey by Samad
(2015) on the determinants of commercial banks’ profitability in Bangladesh established that the loan deposit ratio and LLP to total
assets had a significant impact on the institutions’ profitability. Weersainghe and Perera (2013) researched the influencers of
commercial banks’ performance in Sri Lanka for the period 2001-2011. They established that credit risk had a non-significant positive
association with performance.
Ogboi and Unuafe (2013) investigated the effect of credit risk on the performance of commercial banks in Nigeria and established that
loan loss provisions (LLP) had a positive effect on ROA. A study by Million et al. (2015) found out that LLP had a significant positive
effect on the performance of commercial banks. Tariq, Usman, Mir, Aman, and Ali (2014) investigated the causes of commercial
banks’ performance in Pakistan over the period 2004-2010. Their findings revealed that loan LLP had a positive impact on the
profitability of banks. Boahene et al. (2012) investigated the relationship between credit risk and performance of six selected
commercial banks in Ghana for the period 2005-2009. From the results, it was unveiled that credit risk and banks’ performance had a
positive-significant relationship. It was concluded that in order to achieve excellent results, banks increased the percentage of default
risk elements in their loan rates beyond the actual default risk to increase their profitability.
3. METHODS
The study used a quantitative approach to collect secondary data from the published financial statements of commercial banks in
Kenya over the period 2014-2018.
3.1 Sample Size
A census sampling method was used to select the entire population of 43 commercial banks for the study. According to Sekaran and
Bougie (2016), this method is suitable when dealing with a small population. However, out of the 43 banks, only 31 met the inclusion
criteria since 3 of them were under receivership while the other 9 banks’ data could not be found online.
3.2 Model Specification
The model for this study was selected based on the work of Kolapo et al. (2012), Poudel (2012), and Almekhlafi et al. (2016), who
conducted studies on credit risk and commercial banks’ profitability. According to this model, commercial banks’ performance is
determined by credit risk variables, such as NPLs, LLP, and LA.
Therefore, the model equation becomes;
ROE= β + β 1 NPL + β2 LLP + β3 LA+ Ɛi
Where;
ROE: Return on Equity
NPL: Non-Performing Loan
LA: Loan and Advances
LLP: Loan Loss Provision
β = Constant parameter
β 1- β3 = Coefficients of predictor variables
Ɛi = Error term
Therefore, transforming the equation into natural logarithm it becomes;
ln ROE= β + ln β 1 NPL + ln β2 LLP + ln β3 LA+ Ɛi
4. RESULTS AND DISCUSSION
4.1 Descriptive Statistics
As shown in Table 1, the average return on equity (ROE) for the 31 banks was 0.098. This implies that each shilling from the
shareholders’ equity generated a profit of Kes 0.098. Moreover, the findings indicate that the average non-performing loan (NPL) was
Kes 6.851 billion, average loan loss provision (LLP) was Kes 2.566 billion, and the average loans and advances stood at Kes 74.15
billion. The results of this study concur with the CBK (2019) report, which indicated that commercial banks performed poorly due to a
high level of non-performing loans.
Table 1 Descriptive Statistics
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Variables N Minimum Maximum Mean Std. Deviation
ROE 31 -.24 .2424 .098 .10
Non-performing loans (Kes ‘million’) 31 487.47 28776.5478 6851.21 6901.19
Loan loss provisions (Kes ‘million’) 31 151.95 14377.1370 2565.99 3051.52
Loans and advances (Kes ‘million’) 31 5532.800 378802.2000 74149.84 90144.49
Valid N (listwise) 31
4.2 Credit Risk and Financial Performance
In this study, credit risk was measured using NPLs, LLP, and LA. The following are the results relating to these variables.
4.2.1 Non-Performing Loans and Financial Performance
A multiple regression analysis was conducted to determine the effect of non-performing loans on the financial performance of banks.
From the results (Table 2), NPLs had a non-significant negative impact on ROE (p=0.394) at 0.05 level of significance. Therefore, the
null hypothesis that there is no significant effect of NPLs on the performance of commercial banks in Kenya was accepted. The results
of this study agree with Kaaya and Pastory (2013), who found a non-signficant effect of non-performing loans on the banks’
profitability. However, this study’s findings differ with Yesmine et al. (2015), Alexiou and Sofoklis (2009), and Almekhlafi et al.
(2016), who established that credit risk had a significant and negative impact on banks’ performance. Furthermore, the outcome of this
research is not in line with Nasserinia et al. (2014), who reported that NPLs had a significant positive relationship with the banks’ net
interest margins.
4.2.2 Loan Loss Provision and Financial Performance
The findings in Table 2 reveal that LLP had a non-significant negative effect on the banks’ return of equity (p=0.653) at 0.05 level of
significance. Based on the results, the null hypothesis that there is no significant effect of LLP on the performance of commercial
banks in Kenya was accepted. The findings of this study confirm Merton's (1974) theory that credit risk is negatively related to the
financial performance of a firm. However, the results of this study don’t tally with Samad (2015), Ogboi and Unuafe (2013), and Tariq
et al. (2014), who found that loan loss provision affected the banks’ performance positively.
4.2.3 Loans and Advances and Financial Performance
According to the findings (Table 2), loans and advance had a significant positive impact on the banks’ performance (p=0.001) at 0.05
level of significance. Therefore, the null hypothesis that there is no significant effect of LA on the performance of commercial banks
in Kenya was rejected. The findings of this study are in line with Ramadan (2011), Samad (2015), and Boahene et al. (2012), who
unveiled that LA significantly affected banks’ performance. On the contrary, the results of this study differ with Weersainghe and
Perera (2013), who established that that credit risk had a non-significant positive relationship with profitability.
Table 2 Coefficients
Model Unstandardized Coefficients Standardized
Coefficients
t Sig.
B Std. Error Beta
1
(Constant) -6.920 1.224 -5.653 .000
Ln NPL -.284 .328 -.398 -.867 .394
Ln LLP -.160 .352 -.241 -.455 .653
Ln LA .766 .197 1.167 3.892 .001
a. Dependent Variable: Ln ROE
5. CONCLUSION AND RECOMMENDATIONS
The study used a regression model to examine the effect of credit risk on the financial performance of commercial banks in Kenya.
From the findings, an R Square of 0.479 was derived. This implies that 47.9% of the variation in banks’ financial performance was
contributed by credit risk, and 52.1% of the variation in the performance was due to the error term or other variables not studied.
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Also, it was revealed that non-performing loans and loan loss provision had non-significant negative impacts on the banks’
performance with p=0.394 and p=0.653, respectively. However, LA had a significant positive effect on commercial banks’
profitability (p=0.001).
To reduce NPLs, commercial banks should meticulously appraise their clients before advancing any credit to them. Credit officers
should enhance their recovery efforts on non-performing loans through the adoption of appropriate risk management approaches.
Moreover, the commercial banks’ regulator should strictly enforce prudential guidelines through periodic supervision of financial
institutions.
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