The Effect of Response Strategies of Interest Rate Capping on the Financial Performance of Commercial Banks in Kenya

Abstract

The Kenyan banking industry has for a long time recorded impressive performance due to high interest rate spread. However, due to interest rate capping, banks’ pre-tax profitability declined to Ksh 69.1 billion in the six months period June to December, 2016. Capping of interest rates in Kenya has thus taken a toll on the financial institutions forcing them to re-align their operations to the changing economic environment through formulation of appropriate response strategies. The study sought to determine the effect of response strategies to interest rate capping on the financial performance of commercial banks in Kenya. The study adopted a descriptive survey in accomplishing the objectives of the study. The target population was all the commercial banks that have been in operation for the whole year of 2017 while respondents for the commercial banks comprised of staff at top management level in the 43 commercial banks in Kenya. The study used both primary data and secondary data. The primary data was gathered through structured questionnaires which were self-administered while secondary data was on the financial performance which were obtained from the published annual reports and company sources as well as CBK’s banking supervision reports for years 2013 to 2018. Data was analyzed through descriptive statistics such as: measure of relative frequencies, means and standard deviation. The data was then presented using graphs and tables. The study found out that though the commercial banks have formulated and implemented various response strategies, these strategies impacted differently on the financial performance of the commercial banks. Majority of the respondents (57%) perceived that the response strategies of interest capping implemented had a large extent of effect on financial performance of the commercial banks. All the response strategies investigated were found to have a positive effect on the commercial banks’ financial performance. The regression analysis further obtained a coefficient of determination R square of 0.591indicated that 59.1% of changes in the performance are explained by the studied factors. The event analysis further affirmed that financial performance of the commercial banks prior to introduction of response strategies to interest rate capping was significantly different with the financial performance of commercial banks after introduction of response strategies to interest rate capping. The study concludes that the current financial performance of the commercial banks is largely accounted for by the response strategies implemented. The study also makes the conclusion that through effective response strategies the commercial banks are shielded from adverse negative effects caused by the introduced interest rate capping in Kenya. The study recommends that all the commercial banks in Kenya to establish appropriate response strategies so as to curb the introduced interest rate regulation. The study also recommends that the commercial banks to come up with innovation products and services so as to reduce the dependence towards interest rate incomes. It is further recommended that the Government of Kenya and CBK to revise the set policies on interest rate capping to ensure that neither the banks nor the customers are negatively affected.