What factors drive interest rate spread of commercial banks? Empirical evidence from 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...
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.
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...
Analyzing High Interest Rate Spreads in Kenya: Panel Data Approach
International Journal of Academic Research in Business and Social Sciences, 2018
The study investigated factors behind high interest rate spreads with focus on the Kenyan commercial banks. Ordinary least square model, Fixed and Random effect approaches based on Ho and Saunders (1981) were applied on a panel of 38 commercial banks for the period 2006-2015. The study revealed that bank, industry and macroeconomic factors explain interest rate spreads. However, their impact was weak. We recommend the need to explore both internal and industry-led strategies to reduce the effect of factors associated with the bank.
Effect of Interest Rate Spread on Performance of Commercial Banks in Kenya
European Journal of Business and Management Research, 2024
The interest rate spread has, over a long time, generated a lot of attentiveness in the banking sector in Kenya. This has been due to the huge gap that prevailed between the deposit rate and the lending rate and its impact on the performance of the banking sector. Thus, the objective of the study is to determine the effect of interest rate spread on the performance of commercial banks in Kenya. A descriptive research design was employed, utilizing secondary data from 42 commercial banks in Kenya spanning from 2008 to 2018. A random effects model was used to assess the existence of the causal effect between the two variables. The findings revealed a positive and significant relationship between interest rate spread and the performance of the banks.
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.
Determinants of Interest Rate Spreads in Commercial Banks-A Case of Tanzania
Global Journal of Management and Business Research-C Finance, 2018
The improvement of the financial sector in Tanzania by the introduction of financial reforms was expected to improve the efficiency of the financial sector which includes lowering the Interest rate spread. Beyond the expectations of the reforms, the interest rate spread is high with no sign of narrowing down. This study was set to analyse the determinants of Interest rate spread in Tanzania commercial banks focusing on the internal characteristics. Data from commercial banks incorporated before 2002 were extracted and analysed using SPSS 16 and regression model was established. The results indicate that operating costs, loan loss provisioning, and liquidity risk increases the interest rate spread. While factors of required reserve and non-interest income decrease the interest rate spread
Applied Financial Economics, 2009
This paper contributes to the literature on the determinants of interest rate spreads by using actual loan and deposit interest rate data to examine the macroeconomic and marketspecific determinants of banking sector spreads in middle and low income countries. Numerous variables exogenous to the operations of commercial banks have been widely touted in academic literature and popular discourse to be important factors causing the typically high spreads in developing countries. This paper has tested such claims using panel data econometric techniques, allowing for more focused attention on the variables most likely to impact on spreads. Results are also examined to ascertain whether the determinants of spreads vary across regional groupings of countries.
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 ...