The Effect of Interest Rate Cap Announcement on Stock Returns of Listed Commercial Banks in Kenya

Abstract

Interest rate is one of the most important macroeconomic variable used by central banks to curb variables such as investments and inflation directly related to economic growth. As such any announcement affecting this key variable will influence the different sectors of the economy in different ways. In this study, the researcher selects the banking industry as pricing of its services and products relates directly to prevailing interest rates. Volatility of interest rates leads to volatile stock prices hence market returns. The objective of the study was to find out the effects of interest rate cap announcement on stock returns of listed commercial banks in Kenya. Using an events study methodology, a short term study to conducted to investigate how market returns faired on with an events period of 40 days and an estimation period of 30 days. Data was collected from the NSE and the NSE25 Index used as the benchmark for market prices. The data was analysed using Excel software from where inferences were drawn. Using the market model ordinary least square regression (OLS) regression analysis and a significance test at 95%, it was established all listed financial institutions underperformed the market by registering negative CARs apart from KCB and Standard Chartered which exhibited negative CARs on the first day post event. It was therefore concluded that interest rate capping had a negative effect on stock returns for listed commercial banks in Kenya. The researcher thus recommended that the CBK should have given the banks a grace period before implementation of the new law to protect returns and enable forecast of future cash-flows. Further studies on how the capping announcement using other methodologies such as French-Fama model to enable draw a definite conclusion on the study.