The Effect of Lending Interest Rate Fluctuation on Financial Performance of Commercial Banks in Kenya

Abstract

A country’s economy depends on the banking system as the main financial intermediary. While performing this role they are often faced with a number risks like financial performance risk, foreign exchange risk, Operational hazard, credit hazard and loan rate hazard among others. Mitigation of this risk is important since it impacts on its financial performance. The objective of this study was to establish the impact of interest rate fluctuation on the financial performance of commercial banks in Kenya. This study was anchored by classical theory, Keynes liquidity theory and loanable fund theory. Study population was all the 42 commercial banks operating in Kenya as at 31 December 2017. The research collected the necessary data to address the research question by use of secondary data, in which the income statements from the period between 2008 and 2017. Diagnostic tests were done to establish and validate the most appropriate research model design for the study. The study also carried out tests on normality, autocorrelation and multicollinearity, which is a situation where variables in explanation, two or more, in a model of multiple regression are related highly linearly and was tested using correlation analysis and the variance inflation factors. Analysis was done by use of descriptive statistics, the multiple regression analysis and the Pearson correlation. The t test statistics was used to test the significance of the variables that are independent while the F test statistic and ANOVA was employed to test the regression equation’s significance. The study findings established that there is a positive and significant relationship between interest rates fluctuation and financial performance of commercial banks. The study findings established that there is a negative and significant relation amid credit risk and commercial banks financial performance. The research findings established a positive and noteworthy connection existence between management efficiency and financial performance of commercial banks. The research findings established existence of a significant and positive relation amid the real GDP and financial performance of commercial banks. The study recommends that the Kenyan commercial banks management should ensure that they set up interest rate risk management strategies to ensure that they mitigate the effects of interest rates fluctuations.