ABSTRACT
Banking in Kenya and the financial services in general have been identified as a pillar to achieving Vision 2030. Banking facilitates macro-economic steadiness for long-term development which will transform Kenya to a middle economy country. The growing level of nonperforming loans among Kenyan banks has been a source of concern to all stakeholders. This research ascertained the impacts of firms-characteristics on nonperforming loans of Kenya’s banks. The specific objectives were to assess the effect on liquidity, capital adequacy and bank size on non performing loans of Kenyan banks. In addition, the research examined the moderating impact of interest rate on the association between firms’ characteristics and nonperforming loans of Kenyan banks. The research relied on market power, agency, and liquidity preference and capital buffer theories. Causal design was utilized in this research. The entire number of banks fully operational from 2013 to 2017 is 40 in number. The study used a census approach. Secondary data was gathered from the audited financials of these banks. Diagnostics tests were done for multicollinearity, stationarity and hausman. Data analysis was done based on descriptive analysis and panel regression analysis. Ethical standards and principles were followed to the end in the course of the research. The findings from the panel regression analysis indicated that capital adequacy had a significant effect on non performing loans of commercial banks in Kenya. Bank size had a significant effect on non performing loans of commercial banks in Kenya. Liquidity had insignificant effect on non performing loans of commercial banks in Kenya. Additionally, the study findings revealed that interest rate had no significant effect on the relationship between firm characteristics and non performing loans of commercial banks in Kenya. The study recommends that bank managers should be cautious when granting loans to customers by scrutinizing each application for credit regardless of the levels of liquidity held by banks. The study recommends that banks with larger assets can consider other investment options to diversify against the effect of high loan defaults. Further research can therefore be done to carry out further probe of the effect of liquidity on non performing loans of commercial banks. Additionally, further studies can be carried out on Micro Finance institutions and SACCO for comparison purposes.