The Effect of Interest Rate Capping on Market Capitalisation of Listed Commercial Banks in Kenya

Abstract

The capping of interest rate has affected various stakeholders either positively or negatively. Existing shareholders and potential investors are among the affected parties. Listed banks experienced a fall in share prices with the enactment of the new law which affected the 20-share index, the 25-share index and the all share index. The objective of this study was to analyze the influence of the interest rate capping on market capitalization of listed commercial banks in Kenya. This study was anchored on Fishers Theory, Keynes Liquidity Preference Theory of Interest Rate and Signaling Theory. The study used the descriptive design research to determine how interest rate capping affects the market capitalization. The target population used the eleven (11) commercial banks listed at the NSE as at 31st December 2017. The study used secondary sources that were obtained from the NSE market reports, NSE handbook, CBK reports and the individual banks annual reports. The relationship between interest rates capping and commercial banks market capitalization was measured using regression model. The study findings indicated that there is a negative and noteworthy affiliation between interest rates and market capitalization of listed commercial banks. The study recognized that interest capping had a major effect on market capitalization of the commercial banks that are listed in Kenya.