DOI: 10.36347/sjebm.2014.v01i06.003

Pages: 227-234

Abstract: This study focuses on assessment of factors contributing to non-performing loans (NPLs) in commercial banks in Kenya. The 1990s and the preceding years trend of NPLs was increasing resulting to collapse of many banks while several were put under statutory management. The survivor banks and those formed after learnt that poor loan management was a major cause of the heavy blow. While the borrowers are to blame, the management of the failed institutions must share the blame because of instituting poor lending practices, as some lacked prudent innovative methods of managing NPLs. Improved credit risk management has however reversed the trend of NPLs. Nonetheless the percentages gross NPLs to gross loans are still high and may cause closure of more banks. The objectives of this study was to establish whether risk assessment methods, the magnitude of lack of awareness by borrowers on products being offered, risk management methods ,economic conditions and technological obsolescence contribute to NPLs. To achieve these objectives primary data was collected by administering questionnaires to credit section staffs of selected banks. Data was analyzed using spearman’s correlation coefficient statistical method and was presented by tables. The findings emerged that among the five factors tested risk assessment methods had the highest correlation coefficient hence the main contributor to NPLs, followed by lack of awareness by borrowers on products being offered, while risk management methods had minimal share. The findings will provide banks management with increased knowledge on exposure to credit risk and control of NPLs hence increased profitability.