Strategies Adopted By Commercial Banks In Kenya To Cope With The Challenges Of Interest Rate Capping: A Comparative Study Of Small And Big Banks

Abstract

Commercial banks need to be able to come up with strategies to be able to succeed in the current environment, now more than before. This is because it‟s no longer business as usual as they now operate in a controlled environment. There has to be a shift of thinking in order for them to survive. Looking for other avenues of income is necessary to be able to make profits. Also diversifying into other areas for instance bancassurance, agency banking will help them stay afloat. Small banks may have to think of consolidation especially through mergers and acquisitions. Most banks have experienced reduced profit margins due to interest rate capping thereby forced to rethink and revise their strategies. The research objectives for this study were to determine strategies adopted by small and large Commercial Banks to cope with interest capping and to determine how the challenges of interest capping faced by small commercial banks differ from those of the large banks. The study population consisted of 40 licenced commercial banks which operate in Kenya. The method used to analyse data was descriptive. The study was able to establish that indeed both big and small banks were afftected by interest rate capping in one way or another and that most had revised their strategies to be able to cope with the new challenges.The study established that most banks were using cost, product differention and focus strategies to stay ahead and cope with challenges of interest rate capping. These worked for both big and small banks. Some banks were, however, not affected by interest rate capping as they had already shifted focus to other income revenues. This study recommends that commercial banks shift their focus to other income revenues as opposed to relying on interest from loans and advances only. This will enable them succeed whether or not the interest rate capping is lifted.