Effect of Delinquent Loans on Shareholders Wealth of Commercial Banks Listed at the Nairobi Securities Exchange, Kenya

Abstract

Banks play a role as intermediaries connecting borrowers and lenders in bringing temporarily available resources from corporations and individual investors or customers as well as advancing loans to those that are cash trapped. Well-functioning commercial banks accelerate economic growth, while those banks who fail to manage these loans bare an impediment to economic growth and aggravate poverty instead. Managing delinquency by banks is an important way of determining the shareholders wealth hence the motivation of the study to determine the effect of delinquent loans on shareholders wealth of commercial banks listed at the Nairobi Securities Exchange. The study was guided and limited to the following four specific objectives; to establish the effect of change in Return on Equity, change in Economic Value added, change in Market Value Added and change in Earnings per Share (EPS) on the shareholders' wealth of listed commercial banks. The study adopted descriptive survey design and was conducted in Nairobi County as most of the bank's headquarters are located in Nairobi. The target population comprised of all the 11 listed commercial banks in Nairobi Securities Exchange for 5 years and therefore census was employed. The study was anchored by two theories and one model, Agency theory, stakeholders' theory and Pablo Fernandez Model (PFM). Secondary data was collected from respective banks' annual financial reports between 2011- 2015. The data was analyzed using Statistical Packages for Social Sciences (SPSS) version 21.0 to give mean and percentages. Multiple Linear Regression analysis was used to establish the relationship between the explanatory variables and shareholders wealth of the commercial banks listed at the Nairobi Securities Exchange. Correlation analysis signified a positive relationship between all the independent variables and the independent variable. The regression results indicated that the independent variables significantly predict the shareholders wealth of commercial banks listed at the Nairobi Securities Exchange. The study recommends that the policy makers of listed commercial banks should ensure that there are proper measures put in place when issuing loans in order to increase their yearly Return on Equity, Economic Value Added, Market Value Added and Earnings per Share hence increased shareholders wealth. The study also recommends the use of other indicators of delinquent loans to assess the effect of delinquent loans on shareholders wealth of other institutions of different sectors of the economy. The findings can be significant to managers and make them appreciate the need to monitor and control delinquent loans. Also, the Government as a regulator will benefit in its quest to streamline operations in the banking. The results of the study can also be useful to academicians as it will highlight areas for further research and it will contribute to advancement and new knowledge.