Effect of Selected Factors on Non-Performing Agricultural Loans in Commercial Banks In Kenya

Abstract

Commercial banks play a crucial role in the agricultural sector in advancing 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. The objectives of the study were to establish the effect of Gross Domestic Product, determine the effect of real ffective exchange rate; determine the effect of lending rate on agricultural non-performing loans, and to assess the effect of growth in loan portfolio on agricultural Non-performing Loan. Secondary data relating to commercial banks’ lending to the agricultural sector for a period of 7 years from 2011 to 2017 were collected and using Statistical Package for Social Science computer software to carry out regression analysis procedure, correlation, and descriptive statistics. The portfolio at risk was used as a proxy to Non-preforming agricultural Loans and alculated by dividing the amounts in default by the outstanding loans. Results showed a general increase in the real Gross Domestic Product, gross agricultural loans, and real effective exchange rate over the study period and a decrease in the loan portfolio and the lending rates. Agricultural Non-Performing Loans had a strong positive correlation with real Gross Domestic Product (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). Regression analysis generated an adjusted R2 of 0.783 indicating that about 78.3percent of the variation in the dependent variable is due to independent variables and this was significant (df=4, F=25.393, P<0.001). A significant positive relationship between real Gross Domestic Product and Non Performing Agricultural loans suggests that with growth in the economy, non-performing loans go up that could lead to scaling down of the borrowing and the quality of agricultural loans which are dependent on the aged loan portfolio. An increase in new loans advanced showed lower Portfolio at Risk attributed to the increase in the denominator in its computation reduced percentage portfolio at risk. The cost of credit did not have a significant effect on agricultural Non-Performing Loans. It is therefore concluded that commercial banks to pay attention to the two factors (real Gross Domestic Product and real effective exchange rate) when providing loans to the agricultural sector to reduce the level of impaired loans. 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.