ASSESSING EFFECTS OF NON PERFORMING LOANS AND FINANCIAL PERFORMANCE IN BANKING INDUSTRY IN RWANDA A CASE STUDY OF BANK OF KIGALI PLC (2011-2022)

Abstract

This study assesses how non-performing loans (NPLs) affect banks’ performance in Rwanda as the escalating issue of Non-Performing Loans (NPLs) has emerged as a critical factor with profound implications for the financial performance of commercial banks in Rwanda. The study focuses on secondary time series data from Bank of Kigali Plc between 2011 and 2022, using financial statement in annual reports. Data analysis methods include tabulations, graphs, and regression analysis to assess relationships between key variables. Through the descriptive analysis, the Return on Assets (ROA) showcases a robust financial performance, with an average of 3.66%, ranging from a minimum of 3.3% to a maximum of 4.0%. Conversely, Non-Performing Loans (NPL) present an average of 33.88%, spanning from a minimum of 10.9% to a maximum of 69.7%, signaling variability in loan quality. Moreover, The Return on Equity (ROE) demonstrates encouraging outcomes, with an average value of 19.52%, firmly affirming a healthy return on equity which ranges from a minimum of 16.0% to a maximum of 22.9%, further underscoring the positive trajectory. Non-Performing Loans (NPL) record an average of 33.88%, with values fluctuating between 10.9% and 69.7%, signifying the variances in loan quality. A regression model analysis reported significant insights through the ROE model which highlights that a one-unit increase in Non-Performing Loans (NPL) is associated with an estimated decrease of approximately 0.151-unit in ROE, emphasizing the paramount importance of effective NPL management for sustaining a robust ROE, assuming constant factors. Conversely, the model for ROA generated non-significant coefficients which implies that the ROA might not strongly influence the NPL and This non-significance can be attributed to the sample size's limitations and the complex interplay of Rwandan financial variables. To strengthen their market presence, Rwandan banks are advised to assess borrower risk profiles, lending practices, and risk evaluation procedures. Additionally, diversifying the deposit base and implementing prudent risk management practices can help mitigate NPLs, enhance financial stability, and promote a more balanced banking ecosystem in Rwanda.