The Effect of Interest Rate Volatility and Inflation Rate on the Level of Non-performing Mortgage Loans in Commercial Banks in Kenya

Abstract

The study sought to establish the impact of the volatility of interest rates and inflation rate on the amount of nonperformance of mortgage loans among Kenyans commercial banks. The target population for the study was mortgage financing commercial banks in Kenya as at 31st December 2016. Regression analysis was carried out using SPSS in order to establish how interest rate volatility and inflation rate affected the level of non-performing mortgage loans. Normality test carried out using Kolmogorov-Smirnov and Shapiro-Wilk Test revealed that the data is appropriate for carrying out parametric tests such as regression analysis and analysis of variance. The study found out that the amount of non-performing mortgage loans among Kenya’s commercial banks had been increasing steadily over the study period (2012-2016). The study further found out that interest rates in Kenya were very volatile over the study period (2012-20016) and that there were significant variations in inflation rates over the same period of time. The upticks and downticks of interest rates were attributed to Central Bank of Kenya monetary policies, uncertain economic conditions and aggressive borrowings by businesses and other consumers. High or low inflationary pressure was attributed to weather conditions, international crude oil prices internationally and Central Bank’s monetary policies. The study concluded that there is strong relationship between non-performing mortgage loans, interest rate volatility and inflation rate. Interest rate volatility and inflation rate both accounted for 27.1% of the total variance in non-performing mortgage loans and they both have a positive and significant effect on the level of non-performing mortgage loans among commercial banks in Kenya. This implies that any increase in interest rate volatility and inflation rate (cost of living) would result to increase in non-performing mortgage loans. The recommendation of the study was that the ix Central Bank of Kenya should enforce relevant monetary policies with the aim of curbing the rise in the cost of living which in turn forces customers to default their mortgage loans.