The Effect of Interest Rate Capping on Mortgage Financing of Commercial Banks in Kenya

Abstract

Interest rates play a vital role in steering economic growth of a country and performance of commercial banks. Interest rate is an essential tool applied by commercial banks to control inflation and drive economic growth of country in a manner that promotes healthy competition and consumer protection. Capping of interest rate is an approach that is utilized by the government to control the finance industry. This study was set out to determine the effect of interest rate capping on mortgage financing among commercial banks in Kenya. The study adopted a descriptive research design to establish hypothetical relationship that exists between variables as anchored by Theory of Interest, Modern Monetary Theory and Liquidity Preference Theory. The population of this study includes 43 commercial banks that were operational in the study period. Monthly sources of data were utilized for 30 months from June, 2015 to December, 2017. This data was obtained from annual reports of CBK and data analysis was done using descriptive statistics and paired t-test. The study found that interest rate capping resulted into an increase mortgage financing and bank deposits. Similarly, it led to a significant reduction in bank overdraft and lending rates while decreasing operational efficiency. Paired t-tests results established that bank overdraft and lending rates were statistically significant while mortgage financing, operational efficiency and customer deposits were insignificant. The study recommends the need to uphold interest rate cap on commercial banks in Kenya; this is so because today, more people can access loans and other credit facilities to grow their businesses and personal development. This has contributed positively towards economic growth. This study was limited to time since the effect between capping and mortgage financing was carried within a very short time span: 15 months before and 15 months after. There is need to conduct a longitudinal study that can accommodate a long-time duration in order to be able to establish the nature of existing relationships between variables more accurately. In future, researchers should consider investigating the effect of interest rate caps on macro-economic variables like GDP and inflation.