MACRO-ECONOMIC INDICATORS AND NON-PERFORMING LOANS OF PUBLIC LISTED COMMERCIAL BANKS ACROSS SECURITIES EXCHANGES IN EAST AFRICA
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May 13, 2023
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Banks play an important role in the financial system. Through their intermediation activities, banks facilitate the development process of an economy. Therefore, for this critical role to be sustainable, banks need to financially perform satisfactorily to enable them efficiently undertake their intermediation role. However, their performance in the country has been at risk due to rise in non-performing loans (NPLs) in the market. The rise in non-performing loans has led to risk aversion among banks denying ordinary people credit facilities. Numerous studies associate the rise in non-perming loans in banks with various macro-economic factors and monetary policies. These macroeconomic factors that affect a banking system, non-performing loans pose a worrisome threat to the performance of banks and the financial stability of an economy as a whole. This study established the influence of macroeconomic indicators on non-performing loans of public listed commercial banks in East Africa Securities Exchanges. The study analyzed panel dataset of 29 East Africa listed commercial banks with yearly data that spans the period from 2006 to 2020, a total of 435 bank years. The study used a correlational research design and a document review guide to extract and compile the required secondary data for analysis from the financial statements. The findings indicated that interest rate has a positive and significant effect on nonperforming loans. Inflation has a positive but non-significant effect on nonperforming loans. Growth of money supply has a positive and significant relationship on nonperforming loans of public listed commercial banks. Lastly, bank size has a positive and a significant effect on nonperforming loans of public listed commercial banks. The study concluded that interest rate, growth of money supply and bank size had a significant relationship with non-performing loans. However, inflation did not have a significant effect on non-performing loans. The study recommended that the management of the commercial banks should actively monitor and set appropriate lending rate for the loans they issue. This is because the lending rate has a significant effect on non-performing loans. Increase in lending rate means that the non-performing loans increase. Commercial banks should also enhance periodic/regular credit risk monitoring of their loan portfolios to reduce the level of non-performing loans. The study recommended that the commercial banks should come up with policies to control base lending rates to a manageable level even with high inflation rates. Central Bank of Kenya should incorporate the ever-changing operating environment of commercial banks when making changes in the money supply.
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Chimkono, E. E., Muturi, W., & Njeru, A. (2016). Effect of non-performing loans and other factors on performance of commercial banks in Malawi. International Journal of Economics, Commerce and Management, 4(2), 549-563.
Chioma, D. O., Adanma, S. E., & Clementina, N. O. (2014). Empirical Study of the impact of inflation on bank performance: implication for investment decision making in banking industry in Nigeria. Humanity & Social Sciences Journal, 9(2), 61-71.
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Chodechai, S. (2014). Determinants of bank lending in Thailand: An empirical examination for the years 1992–1996. Thesis.
Clichici, D., & Colesnicova, T. (2014). The impact of macroeconomic factors on non-performing loans in the republic of Moldova. Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research, 1(1), 73-78
Cornwall, J., & Cornwall, W. (2014). A demand and supply analysis of productivity growth. Structural Change and Economic Dynamics, 13(2), 203-229.
Curtis, E. A., Comiskey, C., & Dempsey, O. (2016). Importance and use of correlational research. Nurse researcher, 23(6).
Demirgüç-Kunt, A., & Huizinga, H. (2019). Determinants of commercial bank interest margins and profitability: some international evidence. The World Bank Economic Review, 13(2), 379-408.
Dinçer, H., Yuksel, S., & Adalı, Z. (2018). Relationship between Non-Performing Loans, Industry, and Economic Growth of the African Economies and Policy Recommendations for Global Growth. In Globalization and Trade Integration in Developing Countries (pp. 203-228). IGI Global.
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Fagan, G., Gaspar, V., & McAdam, P. (2016). Immanuel Kant and Endogenous Growth Theory. Scottish Journal of Political Economy, 63(5), 427-442.
Fama, E. F. (2019). Interest Rates and Inflation Revisited. The Review of Asset Pricing Studies, 9(2), 197-209.
Fawad, A., & Taqadus, B. (2013). Explanatory power of macroeconomic variables as determinants of non-performing loans: Evidence Form Pakistan. World Applied Sciences Journal, 22(2), 243-255.
Friedman, I. S. (1987). Toward world prosperity: reshaping the global money system. Lexington Books.
Fry, M. J. (2017). Models of financially repressed developing economies. World development, 10(9), 731-750.
Georgievska, L., Kabashi, R., Manova-Trajkovska, N., Mitreska, A., & Vaskov, M. (2011). Determinants of lending interest rates and interest rates spreads. In InBank of Greece, Special Conference Paper (Vol. 9).
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Goodhart, C. A. E. (2017). The determination of the money supply: flexibility versus control. The Manchester School, 85, 33-56.
Gu, C., Han, H., & Wright, R. (2019). New monetarist economics. International Journal of Economics and Financial Issues, 8(6), 35-45
Gutu, L. M., Străchinaru, A. I., Străchinaru, A. V., & Ilie, V. (2015). The macroeconomic variables’ impact on industrial production in the context of financial crisis. Procedia Economics and Finance, 32, 1258-1267.
Haniifah, N. (2020). Economic determinants of non-performing loans (NPLs) in Ugandan commercial banks. Taylor’s Business Review, 5(2), 137-153.
Hichem, A. Y. A. D. (2016). Poverty, Inequality and Economic Growth in Algeria: An ARDL Approach. Journal of Social and Economic Statistics, 5(1), 1-20.
Hooshyari, N., & Moghanloo, A. P. (2015). Evaluating the impact of inflation on profitability of banks. Kuwait Chapter of Arabian Journal of Business and Management Review, 33(2584), 1-5.
Huybens, E., & Smith, B. D. (2018). Inflation, financial markets and long-run real activity. Journal of monetary economics, 43(2), 283-315.
Illo, A. D. (2012). The effect of macroeconomic factors on financial performance of commercial banks in Kenya. University of Nairobi.
Ireland, P. N. (2019). Economic Conditions and Policy Strategies: A Monetarist View. Cato J., 39, 51.
Irungu, P. N. (2013). The effect of interest rate spread on financial performance of commercial banks in Kenya. (Master’s Thesis). University of Nairobi, Nairobi, Kenya.
Jakab, Z., & Kumhof, M. (2018). Banks are not intermediaries of loanable funds—facts, theory and evidence. International Journal of Economics and Financial Issues, 8(6), 35-45
Kamisky, G. L., & Reinhart, C. M. (2016). The twin crises: The causes of banking and balance-of payment problems. American Economic Review, 89, 473-500.
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