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

Boiyon Geoffrey Kibet; Richard Nyaoga; Robert Kingwara

doi:doi:10.11648/j.ijfbr.20200605.11

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

Boiyon Geoffrey Kibet, Richard Nyaoga, Robert Kingwara

Published in International Journal of Finance and Banking Research (Volume 6, Issue 5)

Received: 25 July 2020 Accepted: 18 August 2020 Published: 19 September 2020

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Abstract

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.

Published in	International Journal of Finance and Banking Research (Volume 6, Issue 5)
DOI	10.11648/j.ijfbr.20200605.11
Page(s)	90-95
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2020. Published by Science Publishing Group

Keywords

Agricultural Loans, Credit, Non-performing Loans, Macro-economic Environment, GDP, Interest Rates

References

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[2]	Ayanda, I. & Ogunsekan, O. (2012). Farmers’ Perception of Repayment of Loans Obtained from Bank of Agriculture, Ogun State, Nigeria. Journal of Agricultural Sciences, 3, 21-27.
[3]	BE. & Smith, M. (1998). Loan Delinquency in Community LendingOrganisations:Case Studies of NeighborWorks Organizations. Housing Policy Debate, 9 (14), 8-10. doi:http://dx.doi.org/10.1080/10511482.1998.9521289.
[4]	Bofondi, M. & Ropele, T. (2011). Macroeconomic determinants of bad loans: evidence from Italian banks. Bank of Italy Occasional Paper.
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[7]	Fofack, H. L. (2005). Nonperforming loans in Sub-Saharan Africa: causal analysis and macroeconomic implications, The World Bank.
[8]	Foos, D., Norden, L., & Weber, M. (2009). Loan growth and riskiness of banks. Centre for Economic Policy Research (CEPR), (pp. 25-27). London, United Kingdom: University of Mannheim, Germany. Retrieved from Electronic copy available at: http://ssrn.com/abstract=1045001.
[9]	Kamau, C. G. & Mohamed, H. B. (2018). Efficacy of Monitoring and Evaluation Function in Achieving Project Success in Kenya: A Survey of County Government’s Projects. IJAME.
[10]	Khemraj, T. & Pasha, S. (2009a). The determinants of non-performing loans: an econometric case study of Guyana.
[11]	Mogaka, A. J., Kiweu, J. M. & Kamau, R. G. (2015). The influence of macro-economic factors on mortgage market growth in Kenya.
[12]	Mwega, F. M. (2016). Financial regulation in Kenya: Balancing inclusive growth with financial stability. Achieving Financial Stability and Growth in Africa. Routledge.
[13]	Onguka, D., Iraya, C. M., Kaijage, E. S.& Kisaka, S. E. (2018). Impact of Corporate Control on Corporate Value: Evidence from Nairobi Securities Exchange.
[14]	Safavian, M. & Zia, B. 2018. The impact of interest rate caps on the financial sector: evidence from commercial banks in Kenya, The World Bank.
[15]	Salas, v. & saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research, 22, 203-224.
[16]	Sharma, U. & An, Y. 2018. Accounting and Accountability in Fiji: A review and synthesis. Australian Accounting Review, 28, 421-427.
[17]	Von Pischke, J. D. & Adams, D. W. (1980). Fungibility and the design and evaluation of agricultural credit projects. American Journal of Agricultural Economics, 62, 719-726.
[18]	World Bank. (2016). Agriculture and achieving the millenium development goals. REPORT NO. 32729-GLB, pp. 3-18. Retrieved from http://reliefweb.int/sites/reliefweb.int/files/resources/F7FC8E4FA7224D3DC125717100507EE1-ifpri-gen-may06.pdf.

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APA Style

Boiyon Geoffrey Kibet, Richard Nyaoga, Robert Kingwara. (2020). Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya. International Journal of Finance and Banking Research, 6(5), 90-95. https://doi.org/10.11648/j.ijfbr.20200605.11

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ACS Style

Boiyon Geoffrey Kibet; Richard Nyaoga; Robert Kingwara. Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya. Int. J. Finance Bank. Res. 2020, 6(5), 90-95. doi: 10.11648/j.ijfbr.20200605.11

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AMA Style

Boiyon Geoffrey Kibet, Richard Nyaoga, Robert Kingwara. Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya. Int J Finance Bank Res. 2020;6(5):90-95. doi: 10.11648/j.ijfbr.20200605.11

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@article{10.11648/j.ijfbr.20200605.11,
  author = {Boiyon Geoffrey Kibet and Richard Nyaoga and Robert Kingwara},
  title = {Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya},
  journal = {International Journal of Finance and Banking Research},
  volume = {6},
  number = {5},
  pages = {90-95},
  doi = {10.11648/j.ijfbr.20200605.11},
  url = {https://doi.org/10.11648/j.ijfbr.20200605.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20200605.11},
  abstract = {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.},
 year = {2020}
}

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TY  - JOUR
T1  - Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya
AU  - Boiyon Geoffrey Kibet
AU  - Richard Nyaoga
AU  - Robert Kingwara
Y1  - 2020/09/19
PY  - 2020
N1  - https://doi.org/10.11648/j.ijfbr.20200605.11
DO  - 10.11648/j.ijfbr.20200605.11
T2  - International Journal of Finance and Banking Research
JF  - International Journal of Finance and Banking Research
JO  - International Journal of Finance and Banking Research
SP  - 90
EP  - 95
PB  - Science Publishing Group
SN  - 2472-2278
UR  - https://doi.org/10.11648/j.ijfbr.20200605.11
AB  - 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.
VL  - 6
IS  - 5
ER  -

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Author Information

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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APA Style

Boiyon Geoffrey Kibet, Richard Nyaoga, Robert Kingwara. (2020). Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya. International Journal of Finance and Banking Research, 6(5), 90-95. https://doi.org/10.11648/j.ijfbr.20200605.11

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ACS Style

Boiyon Geoffrey Kibet; Richard Nyaoga; Robert Kingwara. Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya. Int. J. Finance Bank. Res. 2020, 6(5), 90-95. doi: 10.11648/j.ijfbr.20200605.11

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AMA Style

Boiyon Geoffrey Kibet, Richard Nyaoga, Robert Kingwara. Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya. Int J Finance Bank Res. 2020;6(5):90-95. doi: 10.11648/j.ijfbr.20200605.11

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@article{10.11648/j.ijfbr.20200605.11,
  author = {Boiyon Geoffrey Kibet and Richard Nyaoga and Robert Kingwara},
  title = {Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya},
  journal = {International Journal of Finance and Banking Research},
  volume = {6},
  number = {5},
  pages = {90-95},
  doi = {10.11648/j.ijfbr.20200605.11},
  url = {https://doi.org/10.11648/j.ijfbr.20200605.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20200605.11},
  abstract = {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.},
 year = {2020}
}

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TY  - JOUR
T1  - Effect of Selected Factors on Non-performing Agricultural Loans in Commercial Banks in Kenya
AU  - Boiyon Geoffrey Kibet
AU  - Richard Nyaoga
AU  - Robert Kingwara
Y1  - 2020/09/19
PY  - 2020
N1  - https://doi.org/10.11648/j.ijfbr.20200605.11
DO  - 10.11648/j.ijfbr.20200605.11
T2  - International Journal of Finance and Banking Research
JF  - International Journal of Finance and Banking Research
JO  - International Journal of Finance and Banking Research
SP  - 90
EP  - 95
PB  - Science Publishing Group
SN  - 2472-2278
UR  - https://doi.org/10.11648/j.ijfbr.20200605.11
AB  - 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.
VL  - 6
IS  - 5
ER  -

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