Effect of Selected Bank-Specific and Macroeconomic Factors on Credit Risk Among Commercial Banks in Kenya
DOI:
https://doi.org/10.53819/81018102t5452Abstract
The Kenyan banking sector has experienced a persistent and concerning rise in non-performing loans (NPLs), with the sector's NPL ratio averaging 15% in 2023 and rising further to 16.4% by December 2024. Despite the severity of this challenge, existing Kenyan studies had largely examined credit risk as an independent variable explaining bank profitability rather than as the dependent variable requiring explanation. This empirical gap motivated the current study. The study examined the determinants of credit risk among commercial banks in Kenya using panel data analysis. Specifically, the study sought to examine the effect of bank profitability (ROA) on credit risk, to assess the effect of Loan Loss Provisions (LLP) on credit risk, to determine the effect of GDP growth on credit risk, and to establish the effect of exchange rate on credit risk among selected commercial banks in Kenya. The study was anchored on Credit Risk Theory, Financial Intermediation Theory, Keynesian Macroeconomic Theory, and Purchasing Power Parity Theory. The study adopted a correlational research design using secondary data drawn from the audited financial statements of 10 selected listed commercial banks in Kenya over the period 2019 to 2024, yielding a balanced panel of 60 observations. Data were analysed using descriptive statistics, correlation analysis, and Random Effects panel regression with robust standard errors. Pre-estimation tests including the Skewness/Kurtosis normality test, Variance Inflation Factor, Wooldridge autocorrelation test, Modified Wald heteroskedasticity test, and Hausman specification test were conducted prior to regression estimation. The regression results revealed that bank profitability (ROA) had a negative and statistically significant effect on credit risk at the 5% significance level, confirming that more profitable banks recorded lower NPL ratios. Loan Loss Provisions, GDP growth, and exchange rate were found to have statistically insignificant effects on credit risk at the 5% significance level. The model explained 40.68% of the total variation in credit risk. The study concluded that bank profitability was the most significant internal determinant of credit risk among selected commercial banks in Kenya. The study recommends that commercial banks should prioritise profitability-enhancing strategies, adopt forward-looking provisioning frameworks, and strengthen foreign exchange risk management systems to contain credit risk accumulation.
Keywords: Credit Risk, Non-Performing Loans, Bank Profitability, Loan Loss Provisions, GDP Growth, Exchange Rate, Kenya
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