Effect of Probability of Default and Financial Performance of Commercial Banks in Kenya

Abstract

Purpose: Specific objectives are to establish the effect of effect of probability of default and financial performance of Commercial Banks in Kenya. The theoretical framework was based on asymmetric information.

Methodology/Approach: The adopted mixed research comprising of causal and longitudinal research designs. The study used all commercial banks which are 42 it total. Positivism research philosophy was adopted. The study used secondary data from financial statements of banks. Data was analyzed by both descriptive and inferential statistics. Data was presented using tables.

Findings: From the findings Probability of default negatively affects the Performance of Commercial Banks in Kenya as indicated by a p value of 0.00 in the fixed effect model. This can be explained as a result of the following possible factors: Loans with higher Probability of default are more likely to become non-performing assets or be classified as doubtful debts.

Implications: Implementing a credit risk stress testing plan can effectively mitigate the likelihood of a bank encountering a financial crisis. In order to mitigate liquidity risk, it is advisable for banks to augment their liquid holdings.