Effect of Lending Practices on Financial Performance of Commercial Banks in Kenya: A Survey of Selected Banks within Nairobi

A Research Project Report Submitted to Chandaria School of Business in Partial Fulfilment of the Requirement for the Degree of Masters in Business Administration (MBA)This study was undertaken to examine the effect of lending practices on financial performance of commercial banks in Kenya. The study was driven by the realization that NPLs continue to be a major challenge that is likely to threaten the profitability of commercial banks. The main objective of the study was to examine; the effect of know your customer procedures, interest rates, and bank credit policies on financial performance for commercial banks. Essentially the purpose of the study was to determine the effect of lending practices on profitability of commercial banks in Kenya. The focus of the study was commercial banks that are listed in Nairobi Securities Exchange. The study adopted a descriptive research design to accomplish the research objectives. The target population for the study was all the listed commercial banks in Nairobi County. Purposive sampling was used to select 57 respondents to participate in the study. The study relied on a structured questionnaire as the main tool for data collection. The questionnaire was split into two sections with initial section covering the background information about the respondent. Succeeding sections covered the intricacies of the study where closed questions were presented to the respondent with a 5 – point scale which indicated the different levels of satisfaction. Upon completion of the field survey, the results questionnaires were computed in the SPSS software version 20, and results from the survey were presented using tables capturing different measures of dispersion. The study found that KYC procedures were extremely useful in shielding the commercial banks against exposures to negative credit transactions with unqualified borrowers. Using regression analysis, the study found a significant relationship between the KYC procedures and the financial performance of commercial banks. The study found that interest rates wielded significant influence on the rate and volume of borrowing in commercial banks. Further the study used regression analysis to pinpoint the significant relationship that existed between the interest rates and the financial performance. The study found that credit guidelines policies were vital in enhancing efficiency in the lending operations and finally the study found that there exists a significant relationship between credit policy guidelines and financial performance of commercial banks. The study concluded that, KYC procedure serve as the critical defence line for the commercial banks against fraudulent transactions. Further, the study makes a conclusion that higher interest rates result in slowdown in borrowing but consequently result in positive financial performance in terms of revenues for commercial banks. The study makes a conclusion that, credit policy guidelines define the official operational model that a commercial bank operates when making all transactions related to the lending services, that’s why experts, customers and scholars contribute suggestions on best policy direction. The study recommends for adoption of global standards in effecting KYC procedures in commercial bank. Also the financial institutions should be free to share information about customers amongst the industry players and also the authorities to ensure smoothness in carrying out lending operations. The study finally recommends for the adoption of innovative strategies in creating credit products in the face of interest rate capping (ROK, 2016), as it only way of staying afloat in the turbulent times