Bank Loan and Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

This study was to establish the effect of bank loan on firm performance, the link being cost of capital and banking relationship. Firms might source valuable advice from their bankers. That advice can add value or not and is a subject of empirical investigation. This study was carried out on all the 65 listed companies at Nairobi Securities Exchange (NSE) between 2013 and 2017. There is relationship, between bank's loans to total asset ratio and firm performance, for a group, when return on assets (ROA) is employed as a measure of performance. There is no relationship when return on equity (ROE) is used as a measure of performance. It is difficult concluding that bank loan influence performance. It is possible that banks offer services to their client indiscriminately. It is not important looking at the direction of the relationship between bank loan and performance. In conclusion, firms cannot rely on bank loans and their relationship with bankers to edge out their competitors and earn superior returns.

Keywords: Bank loan; Return on Common Equity; Return on Assets

DOI: 10.7176/RJFA/11-10-05

Publication date:May 31^st 2020