The Effect of Interest Rates Capping on the Levels of Personal Loans Granted by Commercial Banks in Kenya

Abstract

This study sought to determine the effects of interest rates capping on the levels of personal loans granted by commercial banks in Kenya. This study was necessitated by the law passed in August 2016 that came into effect in September 2016 seeking to regulated and place a cap on interest rates charged by commercial banks in Kenya. The argument by commercial banks in Kenya was that this law would have negative repercussions, and that there would likely be cases of credit rationing in the economy, and the economy and commercial banks would end up suffering. A total of 40 commercial banks in Kenya were studied, with data collected for a period of 20 months for analysis, 10 months prior (Oct-2015 to July-2016) and 10 months after (Oct-2016 to July-2017) the passing of the law. Secondary data from the CBK’S monthly banks supervision reports was analysis using the Statistical Package for Social Sciences software(version 16), and the t-test results analysis for statistical significance. The results showed p-values of < 0.001, thus p being < 0.05 leading to a conclusion that the difference is significant, and that interest rates and levels of personal loans advanced by commercial banks are dependent, and that the law on interest rates capping lead to an increase in the levels of personal loans granted by commercial banks in Kenya.