EFFECT OF ASSET RESTRUCTURING ON RETURN ON ASSETS OF FINANCIALLY DISTRESSED COMMERCIAL BANKS IN KENYA

Abstract

The banking industry in Kenya has over the past years made great adjustments aimed at improving the industry
performance. This should be noted in line with the fact that the banking sector plays a significant role in the
growth of economies all over the world, Kenya being not an exception. However, due to liberalization,
globalization, technological advancement and more enlightened customers, the banking sector has been faced
with massive non-performing loans, high overhead costs, and challenging operating environment. Therefore,
banks have had to restructure their business operations by downsizing, focusing on customers care,
tailored/customized products and restructuring of non-performing loans to improve their financial performance
and shareholder value. In developed and developing countries, commercial banks have had asset restructuring
being widely used in an endeavor to improve their performances. While in most cases asset restructuring is
employed when a given structure becomes dysfunctional, some companies and economies restructure to achieve
a higher level of performance and also as a means to survive. Growing competition and globalization along
with tightened fiscal policies have caused commercial banks to strive for greater efficiency as well as increased
cost effectiveness whose ultimate result is improved financial performances. In many cases, the desired results
cannot be achieved without subjecting the corporate strategy and structure to some transformation. In this
context, restructuring is no longer just an option but a necessity for survival and growth. The restructured loans
were found to have a regression coefficient of 2.4804 and a p-value of 0.029<0.05 at 5% significance level an
implication that restructured loans had positive significant effect on ROA of financially distressed commercial
banks in Kenya. This means a unit increase in restructured loans would result to 2.4804 units increase in return
on assets of financially distressed commercial banks. Therefore the null hypothesis that restructured loans have
no significant effect on profitability of financially distressed commercial banks was rejected at 5% significance
level. This could be attributed to the fact that reorganization of loans through restructuring reduces the burden
of repayment on borrowers resulting to reduced defaults hence increased interest income by the banks which in
turn boost the profitability of the firm. The study recommends that financially distressed commercial banks to
enhance their screening efforts before investing in an asset so as to curb incidences of written-off assets as a
result of non-performance.