The Effect of Interest Rates on the Funding of Mortgages by Banks in Kenya

Abstract

Financial institutions play the role of provision of credit facilities to both businesses and individuals. Empirical evidence has always shown that access to finance even inform of credit, has a profound effect on access to and affordability of basic, decent commodities. Such credit facilities include, among others, mortgage loan which is influenced by interest rate and other macro and micro economic factors. Despite the intervention of the central bank on the interest rate charged on mortgages by mortgage providers, interest rate has persistently remained high hindering mortgage uptake. The objective of this study was to investigate the effect of interest rates on mortgage uptake in financial institutions in Kenya. This study employed descriptive research design and multiple regressions analysis. The study covered the period between 2011 and 2015 with a sample size of 22 banks offering mortgage financing. Secondary quarterly data was collected from Central Bank of Kenya annual reports, websites belonging to the target financial institutions and published financial reports. The study findings established a coefficient determinant of 84.5%. The findings of the study found that interest rates and inflation rate positively influences funding of mortgages in banking institutions in Kenya. In line with this finding, the study concludes that there is a direct relationship between interest rates, and inflation rates in banking institutions in Kenya. In addition, the study revealed that funding of mortgages is negatively influenced by mortgage risk in banking institutions in Kenya. This leads to the conclusion that mortgage risk has an inverse effect on funding of mortgages and high level of mortgage risk reduces funding of mortgages. The study concluded that that there is a direct relationship between interest rates, and inflation, which are part of the monetary policy instruments used by the Central Bank of Kenya. The study recommends that the Central Bank of Kenya should instate measures to ensure that interest rates and inflation do not affect funding of mortgages from banking institutions.