Firm size, non-performing loans and financial performance: An analysis of commercial banks in Kenya

Abstract

Commercial banks play a critical role mobilising and allocating financial resources in the economy. However, in the recent past banks have faced stiff competition as some have collapsed. As banks seek to grow in size their credit risk exposure increases that leads to lower than optimal return and profitability.  Non-performing loans represent an expenditure to banks; their collection is expensive and in the long run they are written off. This study tries to explore the effect of non-performing loans on the relationship between firm size and financial performance. Theoretical frameworks relied in this study included the financial intermediation theory, stakeholder theory and behavioural theory of firm growth. Secondary data was collected for a period of 10 years (2014-2023) on all operating banks in Kenya. Unbalanced panel data was obtained since some banks did not operate for the entire period under focus. Diagnostic analysis carried out indicated that ROA as a measure of financial performance was not appropriate when total assets are used as a measure of firm size due to high levels of autocorrelation. Data was transformed to conform to test of normality. The findings concluded that firm size has a positive and significant effect on financial performance while NPLs have a negative and significant effect on the relationship between firm size and financial performance. Recommendation to policy makers, practitioners and regulators in banking sectors have been made based on research outcomes. This study adds to the existing body of knowledge, explore theories and provide empirical evidence.

Keywords:       Firm size, Non-Performing Loans, Credit risk, Total Assets, Number of Loan Accounts, Commercial banks in Kenya.