Effects of Interest Rate Capping on Performance of Commercial Banks in Kenya

Abstract

The rate of interest charged on loans and advances which makes banks earn interest income and the rate of interest paid to depositors, which translates to the cost of funds both have a significant impact on the performance of any commercial bank. This study sought to determine the effects of interest rate capping on performance of commercial banks in Kenya. The capping law took effect on 14th September 2016 as a result of the numerous issues raised by the public with regard to the cost of credit. The law stipulates that the lowest rate banks can offer on deposits is 70% of the CBR and the lending rate at 4% above the CBR. This study had three specific objectives: To establish the effect of interest rate capping on credit uptake performance of commercial banks in Kenya; To identify the effect of interest rate capping on profitability of commercial banks in Kenya; To investigate the effect of interest rate capping on the portfolio of non-performing loans on commercial banks in Kenya. The descriptive research design was utilized in the study. The study targeted the 36 licensed commercial banks out of the 43 registered ones, leaving out 6 commercial banks which are either acquired by other banks, under receivership or statutory management. Secondary data capturing the performance of the commercial banks over the period 2015-2017 was obtained from published financial statements, CBK publications and journals, World Bank Journals and relevant Government Ministries. The data obtained from the study environment was analyzed through descriptive statistics and inferential statistics by use of SPSS version 16. The findings of the study established that credit uptake increased following the introduction of the capping law. This was mainly due to issuance of loans to large borrowers. The profitability of the banks in the period under review increased. In addition, the non performing loans portfolio also increased. The study concluded that interest rate capping positively affects performance of commercial banks. The study recommends that the Central bank and the Government through the ministry of Finance should come up with policies that benefit banks, large and small borrowers.