Effect Of Interest Rate Capping On Stock Returns Of Listed Commercial Banks At The Nairobi Securities Exchange

Abstract

The study sought to find out the consequence of interest rate capping on stock returns of commercial banks quoted at the Nairobi Securities Exchange. The secondary data used for analysis in this study was gathered from the Nairobi Securities Exchange in regard to the 11 commercial banks listed. The study was an event analysis of the coming to law of Interest Rate Capping law on 14th September 2016. The study analyzed the reaction of stock returns of 11 listed commercial banks 30 days before the law came to action and 30 days after the law came to action. Analysis of the data was done with the aid of Microsoft‟s Excel (2013). T-test was carried out to establish the significance of interest rate capping on stock returns. The study found out that only 18.18% (Kenya Commercial Bank and CFC Bank) reacted negatively to the interest rate capping. All the other (81.82%) banks reacted positively. -Further, the study found out 7 (63.64%) commercial banks recorded negative abnormal returns while 4 (36.36%) commercial banks recorded positive abnormal returns in reaction to the interest rate capping law. However, none of the abnormal returns were found to be statistically significant. Further, none of the abnormal returns recorded were greater than 1 or less than -1 implying that none of the investors benefited or lost abnormally as a result of interest arte capping. The commercial banks that recorded positive abnormal returns were Kenya Commercial Bank, Co-operative Bank Limited, Diamond Trust Bank Limited and NIC Bank Limited. The ones that had negative abnormal returns were Equity Bank Limited, Barclays Bank Limited, Diamond Trust Bank Limited, National Bank Limited, CFC Bank Limited and I&M Bank Limited. The study found out that there was a steady decrease in Cumulative Average Abnormal Returns of the commercial banks listed at the Nairobi Securities Exchange. These implies that the coming into law of the interest rate capping legislation on 14th September 2016 had a cumulative negative effect on the stock returns for commercial banks listed at the Nairobi Securities Exchange. This implies that although some banks didn‟t react negatively to the interest rate capping, the cumulative effect of the event had an adverse effect on the stock returns in the long run. The study found out that interest rate capping had a cumulative negative effect on the stock returns for commercial banks listed at the Nairobi Securities Exchange. The study therefore recommends that Central Bank of Kenya should reconsider and appeal the interest rate capping as this is detrimental to the performance of commercial banks. The Central bank of Kenya should lias with commercial banks to unsure that the even if the interest rate capping law is abolished, the commercial banks does not exploit borrowers by charging exorbitant interest rates. The study was entirely dependent on secondary data. As a result, the researcher didn‟t have control over the accuracy the data provided. This is however a general problem when dealing with secondary data. The researcher tackled the challenge by purchasing the data from NSE licensed vendors. The study was conducted on the assumption that no other major corporate or non-corporate events took place during the event window to influence abnormal reaction of the commercial banks share prices. In future, another study should be carried out to establish if there were any other events that may have affected the conclusion of this study.