Effect of Interest Rate Spread on Performance of Commercial Banks in Kenya (original) (raw)
Related papers
2013
Despite the liberalization of the financial sector, high interest rate spreads is still an issue of concern in a number of African countries, including Kenya. This paper investigates the determinants of interest rate spreads in Kenya’s banking sector based on panel data analysis. The empirical results show that bank-specific factors play a significant role in the determination of interest rate spreads. These include bank size based on bank assets, credit risk as measured by non-performing loans to total loans ratio, liquidity risk, return on average assets and operating costs. The impact of macroeconomic factors such as real economic growth and inflation is not significant. Similarly, the impact of policy rate as an indicator of monetary policy is found to be positive but weak. On average, big banks have higher spreads compared to small banks. There is need for explore policy options meant to enhance competition in the industry and measures to break market dominance will be one such...
What factors drive interest rate spread of commercial banks? Empirical evidence from Kenya
Review of Development Finance, 2014
The paper empirically investigates the determinants of interest rate spread in Kenya's banking sector based on panel data analysis. The findings show that bank-specific factors play a significant role in the determination of interest rate spreads. These include bank size, credit risk as measured by non-performing loans to total loans ratio, return on average assets and operating costs, all of which positively influence interest rate spreads. On the other hand, higher bank liquidity ratio has a negative effect on the spreads. On average, big banks have higher spreads compared to small banks. The impact of macroeconomic factors such as real economic growth is insignificant. The effect of the monetary policy rate is positive but not highly significant. The results largely reflect the structure of the banking industry, in which a few big banks control a significant share of the market.
Determinants of Interest Rate Spread: Some Empirical Evidence from Kenya’s Banking Sector
International Business Research, 2014
This paper analyzes the role played by bank and industry-specific factors as well as macroeconomic variables in the determination of interest margins in Kenya's banking sector. Decomposition of the spread using income and balance sheet of the banking sector as a whole and panel data analysis of 39 commercial banks yielded consistent results which highlight the significant role played by bank and industry specific factors and macroeconomic variables in interest rate spread determination. It is shown that between 7 -10 per cent of the interest margin was attributable to operating costs. Moreover, a 1 per cent increase in operating costs translates to 0.38 per cent increase in interest margins for the sample of banks studied. In addition, a 1 per cent increase in non-performing loans leads to an upward adjustment of interest margins by 0.12 per cent. Macroeconomic factors also contribute to changes in the interest margin. A 1 per cent increase in Treasury bill rates leads to an upward adjustment of interest margins by 0.1 per cent. Likewise, a 1 per cent increase in GDP growth and exchange rate variability results in 0.05 and 0.06 per cent increase in interest spread respectively. In contrast, a 1 per cent increase in loans-liabilities ratio (reflecting degree of intermediation) results in interest margin reduction by 0.17per cent. The results therefore emphasize the need to improve banking sector efficiency, deal with non-performing loans and maintain general macroeconomic stability.
The effect of loan size on interest rate spread in commercial banks in Kenya
2014
The objective of this study was to examine the effect of loan size on the interest rate spread in commercial banks. This study was largely a quantitative research. Given that the purpose of this study was to examine the effect of loan size on the interest rate spread, the appropriate design was causal predictive research design. The study population was drawn from commercial banks currently licensed and trading in Kenya. Since the number of banks is not so large, all the 43 commercial banks were targeted in the study. Secondary data was used in this study. This was collected from annual reports of the 43 commercial banks for the 10 year period between 2004 and 2013. The collected data was organised into SPSS and analysed using descriptive analysis, correlation analysis, and regression analysis. The study found that the model accounted for 87.1% of the variance in interest rate spread of the commercial banks R 2 = .871). The F-statistic of 1.683 was not significant at 5% level of significance, p = .425. This shows that the model was not fit to explain the effect of loan size on the interest rate spread. The results show that loan size, credit risk, operating costs and liquidity have a weak negative effect on the interest rate spread of the banks while bad loans/total loans, collateral/total loans, bank size and performance had weak positive effect on the interest rate spreads of the commercial banks. All the effects were insignificant at 5% significance level. The study therefore concludes that loan size does not influence the interest rate spread of the commercial banks. The study recommends that other factors that influence the interest rates of commercial banks be used in order to ensure that commercial banks set optimal interest rate spreads and thus improve their performance.
The success of a commercial bank depends on income and value of its assets (loans). This study focused on interest rates and their effect on performance of the commercial banks in Kenya. Descriptive research design was adopted with a target population of 153 respondents from the credit departments. Stratified random sampling was used to select a sample of 111 respondents who were administered with a structured questionnaire. The collected data was collated and coded for descriptive and inferential analyses using the Statistical Package for Social Sciences version 23. Findings revealed that Central bank (CBK) policies affect the interest rates charged (mean 4.23), interest rates charged vary depending on repayment period (mean 3.85), higher portfolio at risk (PAR) increases the number of NPLs (mean 3.77) and increased interest income promotes high performance by banks (mean 3.94).There was a statistically significant relationship between interest rates, loan provision and performance of commercial banks. The study recommended that commercial banks should effectively respond to CBK interest rate policies, minimize number of bad loans and strive to maintain low PAR.
The Effect of Lending Interest Rates on the Financial Performance of Commercial Banks in Kenya
The International Journal of Business & Management
The paramount significance of a robust banking sector in driving economic growth, executing effective monetary policies, and upholding macroeconomic stability cannot be overstated. This study was centered on discerning the influence of lending interest rates on the financial performance of Kenya's commercial banks from 2015 to 2022. Employing a moderated multiple regression methodology, secondary balanced panel data encompassing 27 mortgage-offering commercial banks and 189 data points were scrutinized. The results of the regression analysis divulged that the autonomous variables explicated a substantial 86.69% (R2=0.8669, p=0.0020) variance in the financial performance of these Kenyan commercial banks. Notably, the coefficient of lending rate manifested as -0.158824, underlining a statistically significant (p=0.0020) association. Consequently, the null hypothesis was invalidated. The research concludes that lending interest rates exert a substantial and adverse impact on the fi...
2017
This study sought to determine the effect of macroeconomic determinants on interest rate spread. The study contributed to the literature on the effects of macroeconomic determinants on interest rate spreads of Commercial Banks in Kenya. This study adopted qualitative research design in assessing the effects of macroeconomic determinants on interest rate spreads of Commercial Banks in Kenya. The study targeted all Commercial Banks in Kenya but the sample size constituted 12 commercial banks in Kenya. Proportionate sampling technique was employed. Data for the study was obtained from Central Bank of Kenya reports, CBK Annual Supervisory reports, Annual Reports of the Commercial Banks and audited financial statements of the sampled banks. Descriptive statistics was used to state the means of the variables over a 5 year period under study. Correlation analysis was used to examine if there was any relationship or degree of association between macroeconomic determinants and bank interest ...
The Determinants of Interest Rates Spread in Kenya
2016
Purpose: The main objective of the study was to analyze the determinants of interest rate spread in the Kenyan economy. Its specific objectives were to establish the bank specific factors macroeconomic factors and industry specific factors that influence the interest rate spread in Kenya.Methodology: This study analyzed the determinants of interest rate spreads in Kenya by focusing on eight banking institutions that significantly control deposits and loans market. The study used panel least squares estimation technique on annual data between years 2002 to 2011 to analyze the determinants of interest rates spreads as grouped in literature under: Bank-Specific Factors, Industry-specific data and Macroeconomic factors. The study was carried out using panel quantitative data analysis which involved the panel unit root test; Levin-Lin Chu and Im-Pesaran-Shin Tests and among other diagnostic tests including normality test, heteroscedasticity, Multicollinearity and Hausman tests. The study...
Interest rate spreads (IRS) are a common measure of financial market. It is worth noting that there is a conspicuous disparity in IRS amongst the various commercial banks in Kenya and specifically on unsecured loans. Though there have been extensive research studies on IRS, the effect of risk factors on disparities in IRS, nevertheless, has not sufficiently been researched. The objective of the study was to establish the effect of risk factors on IRS disparity for unsecured loans. The population of the study comprised of the 46 commercial banks in Kenya. The target population constituted accounting, credit and management staff of commercial banks within Nakuru town. The study adopted descriptive research design. Structured questionnaires were used to collect primary data while the secondary data was collected through the analysis of the Central Bank of Kenya's Reports and targeted commercial banks' published financial statements. The SPSS was used to process and analyze the ...
Asian Journal of Economics, Business and Accounting, 2021
In the spike of increasing occurrences of non-performing loans among commercial banks in Trans-Nzoia County, Kenya, interest rate spread should be given serious consideration through more empirical research. This study therefore sought establish the relationship between the interest rate spread and occurrence of non-performing loans among commercial banks in Trans-Nzoia County. It specifically; looked into the credit risk management impacts non-performing loans, bank regulation impacts non-performing loans, and the capital sufficiency impacts non-performing loans. Adopting descriptive research design, the study used the 78 employees of commercial banks in Trans-Nzoia County as its targeted. The entire population participated in the study as respondents. Data, which was gathered using a questionnaire, was using quantitative approach to yield descriptive and inferential statistics. Multiple regression analysis was used to draw inferences from the findings. All factors were found to b...