Effect of Interest Rate Capping on Credit Growth of Microfinance Banks in Kenya

Abstract

The study sought to establish the impact of interest rate capping on credit growth of microfinance banks in Kenya. The study adopted descriptive research design. The target population was 11 microfinance institutions authorized by the Central Bank of Kenya. Data was analyzed using descriptive analysis, correlation analysis and logit regression analysis. The correlation results indicated before interest rate capping asset quality and credit growth of microfinance banks are negatively and significantly related (r=-0.449, p=000). After interest rate capping, the relationship between asset quality and credit growth of microfinance banks remained negative and significant but worsened (r=-0.635, p=000). Logit results indicated that the model was statistically significant relationship between asset quality (p=0.0277, OR=2.212524) and credit growth of microfinance banks. The odds ratio OR=2.212524 implies that there is a significant difference on the effect of asset quality on credit growth of microfinance banks in Kenya a result of interest rate capping. Logit results indicated statistically significant relationship between liquidity (p=0.0021, OR=1.179336) and credit growth of microfinance banks. The odds ratio OR=1.179336 implies that there is a significant difference on the effect of liquidity on credit growth of microfinance banks as a result of interest rate capping. The model results indicated a statistically significant relationship between capital adequacy (p=0.003, OR=0.939876) and credit growth of microfinance banks. The odds ratio OR=0.939876 implies that there is a significant difference on the effect of capital adequacy on credit growth of microfinance banks as a result of interest rate capping. The study concluded that capital adequacy, asset quality, liquidity influences credit growth of microfinance banks. The study recommends that microfinance banks should invest in other lines of business for example product diversification and investments to supplement their income from core business. This will boost their stability and contribute to profitability. It further recommends that microfinance banks should make maximum use of their available resources for example assets to boost their profitability and effectively execute their core functions. Microfinance banks should comply with banking rules and regulations to avoid the increasing incidence of nonperforming loans and the regulatory authorities should regularly access the lending behavior of the banking industry. The study further recommends that microfinance banks should adopt sound financial risk management practices in order to promote profitability and create wealth to their shareholders. The study also relied on percentage change in loan book value as a measure of credit growth. It is important to note, however, that there are other indicators that can be used to measure credit growth. The indicators include loan delinquency, loan quality and net nonperforming loans. Future research should attempt to study the effects of interest rate capping on credit growth of microfinance banks while measuring credit growth using loan delinquency, loan quality and net nonperforming loans as indicators. The study focused only on microfinance banks. Commercial banks were sharply affected by the law introducing interest rate capping. Future research should involve commercial banks by specifically focusing on the effect of interest rate capping on credit growth of commercial banks. These may form a basis of comparison between the two segments of financial institutions.