The Effect of Lending Rate on Loan Performance of Commercial Banks in Kenya

Abstract

The banking sector in Kenya has recently had new laws introduced that sought to cap interest rates, notwithstanding the warnings by the commercial banks, the CBK governor, Kenya Bankers Association on the adverse effect on various sectors in the economy for implementation of the law. One year after the implementation of the law, this study sought to look at the effects of the lending rate on the loans performance for commercial banks in Kenya. In recent, times especially with the interest rate capping, banks have registered either an increase or decrease in their loans performances which is usually measured by the levels of non-performing loans in their portfolios. In addition, loan performance is a key indicator on how well these financial institutions perform in terms of profits and the amount of cash flow that they have. Banks in Kenya have exhibited these kinds of tendencies in recent times. The study identified financial performance, capital adequacy and bank size as control variables. Data was collected by the use of secondary data collection methods for all the commercial banks licensed in Kenya for the period 2013 to 2017. However full information was obtained for 35 commercial banks as some banks did not have information on some years for the study period. This represented a response rate of about 83% which was significant for data analysis. The study used a multiple linear regression model to determine the effect of lending rates on loan performance. The data was first diagnosed on whether it complied with the normality, collinearity, and autocorrelation requirements. The resulting regression model had a coefficient of determination of 27.8% and the F test conducted rejected the null hypothesis and was significant as the p value was less than the alpha value of 0.05. This meant that the effect of lending rate on loan performance for commercial banks in Kenya, was statistically significant.