Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya
International Journal of Finance and Banking Research
Volume 6, Issue 5, October 2020, Pages: 90-95
Received: Jul. 25, 2020; Accepted: Aug. 18, 2020; Published: Sep. 19, 2020
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Boiyon Geoffrey Kibet, School of Business, Egerton University, Nakuru, Kenya
Richard Nyaoga, Department of Accounting, Finance & Management Science, Egerton University, Nakuru, Kenya
Robert Kingwara, Department of Accounting, Finance & Management Science, Egerton University, Nakuru, Kenya
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Commercial banks plays a crucial role in the Agricultural sector in advancing farmers affordable credit to improve their productivity, enhancing their food security, and expanding their income. Financing of the sector however continues to get the lowest levels of credit in Kenya compared to other sectors due to poor loan repayment. This study aimed to establish the effect of macro-economic factors of Gross Domestic Product (GDP), Real Effective Exchange Rate, and the Lending rate on Agricultural Non-performing Loans (NPL) and to assess the effect of Growth in Loan Portfolio on Agricultural NPL. Secondary data relating to Commercial Banks lending to the agricultural sector for a period of 7 years from 2011 to 2017 was collected from forty-two Commercial Banks in Kenya. Results showed that agricultural NPL had a strong positive correlation with real GDP (0.836, p<0.001), the Real Effective Exchange rate (0.865, p<0.001), and a weak inverse correlation with the average Bank Lending rate (-0.48, p<0.01). The study concluded that commercial banks should pay close attention to the two factors (Gross Domestic Product and Real Effective Exchange rate) when providing loans to the agricultural sector to reduce the level of impaired loans. The banks active in agricultural lending should, therefore, take the performance of the real economy into account when extending loans given the reality that loan delinquencies are likely to be higher during periods of economic boom as suggested by the study results. Equally Commercial banks should trade with high prudence to curb a possible impairment due to reckless lending and over-estimation of the borrower’s ability to pay back. They should constantly review the complexity and diversity of the new loans to the agricultural sector periodically like quarterly, and do aging analysis to ensure that the growth in agricultural loans do not serve to window dress the portfolio at risk percentage while the actual amounts in default are increasing.
Agricultural Loans, Credit, Non-performing Loans, Macro-economic Environment, GDP, Interest Rates
To cite this article
Boiyon Geoffrey Kibet, Richard Nyaoga, Robert Kingwara, Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya, International Journal of Finance and Banking Research. Vol. 6, No. 5, 2020, pp. 90-95. doi: 10.11648/j.ijfbr.20200605.11
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