Effect of Interest Rate Capping on Loan Portfolio Performance of Listed Commercial Banks in Kenya

Abstract

This study sought to determine the effects of interest rates capping on the increase of value of the loan book, customer deposits, firm size and non-performing loans of commercial banks was significant one across the industry. This study was necessitated by the law passed in August 2016 that came into effect in September 2016 seeking to regulate and place a cap on interest rates charged by commercial banks in Kenya. The argument by commercial banks in Kenya was that this law would have had negative repercussions, and that there would likely be cases of credit rationing in the economy, and commercial banks would end up suffering. This study adopted a study research design and data collection was both quantitative in nature, from banks’ financial statements .The population targeted was all listed commercial banks at Nairobi Securities Exchange. Quarterly data was collected and analysed for a period of 12 quarters, with 6 quarters period prior (31st March 2015 to 30th June 2016) and 6 quarter after (31st Dec 2016 to 31st March 2018). Data was obtained from the Central bank of Kenya, where quarterly report of the banking sector in Kenya is usually carried out. The event study on the dependent variables was analyzed in terms of Paired T-test analysis both periods of the study. Natural log of all the variables was used for efficiency of data analysis in SPSS. This study conducted paired samples test to find out whether the increase of value of the loan book, customer deposits, firm size and non-performing loans of commercial banks was significant one across the industry. The results of this study revealed that interest rates and levels of personal loans advanced by commercial banks are related. The results indicated that there was a significant change and movement in the levels of personal loans for the two periods, and that after the interest rates capping at 14%, the levels of personal loans advanced by commercial banks increased significantly. This leads to the conclusion that at low interest rates, demand for personal loans increases, and that at higher rates of interest, demand for personal loans goes down. Having concluded that there was significant change on the increase of value of the loan book, customer deposits and firm size the study recommends that commercial banks should adopt effective lending practices that will enable reduction of non-performing loans which have increased after capping of interest rates.