Strategic Responses to Interest Rate Capping by Commercial Banks in Kenya

Abstract

The capping of commercial banks’ interest rates have changed the business environment forcing the financial institutions to align their operations to the changed environment. The objective of the study was to determine the strategic responses employed by commercial banks in Kenya to cope with interest rate capping. The study was guided by Open Systems Theory, Dynamic Capability Theory and Institutional Theory. The study adopted a cross-sectional descriptive research design. The target population was the 42 commercial banks registered with Central Bank of Kenya(CBK) as at December 31st 2016. Therefore this was a census study. The respondents were the management staff in the commercial banks. The study collected primary data through use of a questionnaire. The data collected was edited, coded, entered into SPSS which also aided in data analysis. The data was analyzed using descriptive statistics which included frequency distribution tables, mean and standard deviation. The analyzed data was presented using tables, charts and graphs. The study found out that interest rates capping had narrowed the pricing gap of the banks and had removed banks’ ability to price risk. Interest rates capping had not helped to achieve consumer protection from exorbitant interest rates as it was intended. The studyqfound out that interestqrate caps had reduced the supply of credit to the borrowers to a great extent especially the risky borrowers and low income borrowers. It had also increased the operational costs and risks to the bank to a great extent. To cope with interest rate capping, commercial banks were adopting modern technology in bank operations to enhance efficiency and expanding into new markets. The banks were also innovating new products and services, diversifying into other products offerings as well as cutting on staff expenses and benefits. The study concludes that interest rate capping has an effect on the commercial banks efficiency, stability and performance. The move did not account for several factors that might affect the banks’ decision to opt for certain spreads. Introduction of interest rate caps has weakened bank’s balance sheets and posed a risk to financial efficiency and stability and therefore banks are adopting these strategies as a way to maintain their performance and competitive edge in the market. The study recommends that CBK should review or remove the interest rate cap to allow forces of demand and supply to set prices of the interest rates charged. The study also recommends for realignment especially of the small banks through mergers and acquisition so that they are able to compete with their larger counterparts.