The effects of interest rate spread on non-performing loans in commercial banks in Kenya.

Abstract

The main goal of any banking institution is to maintain profitable from its operations to ensure its sustainability and continued growth. Banks generate their profits mainly from providing loan facilities to its customers by charging them at competitive interest rates. However, the performance of the economy, especially at a time of recession, has seen customers default on their loan facilities. This has resulted in the existence of high levels of non-performing loans (NPLs) across the world since the 2008 financial crisis. High levels of NPLs have been evidenced to worsen the performance of commercial banks and have crippling effects on the economy. In Kenya, the level of NPLs has been evidenced to be growing in the last decade despite the efforts of the government to implement fiscal and monetary policies to stabilize the economy. This study seeks to determine how interest rate spreads as a micro-economic variable influence the level of NPLs in commercial banks, which translate to the total number of NPLs in the country. Keywords: Non-performing loans, interest rate spread