Effect of Interest Rate Capping on Financial Performance of Commercial Banks in Kenya
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Date
2018Author
Wanjiru, Hildah; M
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
The rate of interest is a key factor that drives the growth of the economy and bank
performance. Interest rate is one of the important tools utilized by central bank of
Kenya to regulate inflation and bolster economic development. Capping of interest
rate is a mechanism used by government to regulate the finance sector. This study was
set out to determine the effect of interest rate capping on Kenyan commercial banks’
financial performance. The study adopted a descriptive research design to establish
hypothetical relationship that exists between variables as supported by Irving Fisher’s
classical and approach theory that anchor this study. The populations for this study
include 42 commercial banks that were operational in the study period. Monthly
secondary sources of data were used for 15 months, from December, 2014 to
September, 2018. This data was obtained from annual reports of CBK. Data analysis
was done using descriptive statistics and paired t-test and the study found that upon
capping of interest rates the performance of commercial banks declined significant as
revealed by ROA. However, capital adequacy and customer deposits increased after
capping of interest rates. Operational efficiency decreased by a small margin while
lending rates increased greatly. Similarly, quality of loans improved moderately; this
was a consequence of effective implementation of credit policies by commercial
banks. It was deduced that lending rates and quality of loan demonstrated significant
differences before and after capping. However, capital adequacy, operational
efficiency, ROA and customer deposits revealed insignificant differences. This study
recommends the need to do away with capping of interest rates. This is because, it has
impacted negatively on commercial banks, as a consequence lending for private
companies has deteriorated. Majority of Kenyans particularly low income earners
cannot access bank lending and this has led to increased borrowing costs. The
research was limited to a descriptive type of research design that establishes the
nature of existing relationships amongst variables without establishing the ‘cause and
effect’ relationships amongst variables. There is need to explore the long-term effects
of interest rate capping and its effect on commercial banks’ financial performance to
determine whether capping should be maintained or removed.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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