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

Abstract

Commercial banks need proper asset restructuring so as to stage a remarkable growth of the banking industry
as well as revitalize their management efficiency. These banks must evaluate their performance and where
possible restructure their assets to minimize costs and increase efficiency. 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. This study sought to determine the effect of asset restructuring
on return on equity of financially distressed commercial banks in Kenya. Non-performing assets were found to
have a regression coefficient of -1.4696 and a p-value of 0.0247<0.05 at 5% significance level. This imply that
non-performing assets have negative significant effect on Return on Equity (ROE) of financially distressed
commercial banks. Hence, a unit increase in non-performing assets of a financially distressed commercial bank
would occasion to 1.4696 decrease in its return on equity. Thus, the null hypothesis that non-performing assets
have no significant influence on profitability of a financially distressed commercial bank in Kenya was rejected
at 95% degree level of confidence. This could be attributed to the fact that a default of loan facility increases the
ratio of bad loans (non performing assets) and force commercial banks to make higher provisions, which means
lower profitability.