The Relationship Between Interest Rate Regulation and Financial Performance of Listed Commercial Banks in Kenya

Abstract

Interest irate iis iessentially ithe iprice iof ideposits. iLike ithe iprice iof iproducts iand iservices iin ifree imarkets, iinterest irate ishould ibe idetermined iby ithe imarket. iThis icauses ithe ieconomy ito irun iefficiently. iHowever, ilike iin iother imarkets ipolitical iagitation ifor iinterest irate icontrol iis iever ipresent. iProponents iof iinterest irate icontrol iargue ithat iit iallows ithe ipublic ito iaccess iloans iand iborrowing iat iaffordable irates iand ithus iincreases iinvestments iand ieconomic igrowth. i iFree imarkets ieconomist iargue ithat iany iprice icontrol ileads ito iinefficient iallocation iof iresources. iFurther, isuch icontrols ithe ifinancial iinstitutions i(lenders), ithe iconsumers i(depositors), iand iultimately ithe ientire ieconomy. iBank iprofitability ifor iinstance imay isuffer, ias ithey iare iunable ito iattain iequilibrium i(equal imarginal irevenue ito imarginal icosts). iHowever, ithose iwho iargue ithat ithe iuse iof iinterest irate icontrol imaintain ithat ithe iborrowers iwould ibenefit iwhile ilimiting ithe ibanks’ iprofits. iThis istudy iwas iaimed iat iestablishing ithe inature iof ithe irelationship ibetween iinterest irates iregulation iand ithe ifinancial iperformance iof ibanks iin iKenya. iThe ipopulation iof ithe istudy iwas iall ithe ilisted icommercial ibanks iwith ithe iNairobi iSecurities iExchange. iA icensus isampling iapproach iwas iemployed ito icomprise iall ithe iten ilisted icommercial ibanks. iThe istudy iutilized ipurely idata ithat iwas isecondary iand iwas iobtained ifrom ithe idatabase iof ithe iCentral iBank iof iKenya, iNSE iand ithe iBanks’ ireports ifor ia ireporting iperiod iof ifive iyears i(2013 ito i2018). iThe iquantitative ianalysis iwas iperformed iusing iSPSS iversion i24. iThe istudy iused iboth ithe idescriptive istatistics iand ithe iinferential ianalysis ito ianalyze ithe idata. iEvent ianalysis iwas ialso iconducted ito iestablish iwhether ithe icommercial ibanks iperformance imeasures iwere istatistically idifferent ifrom ithose ibefore ithe iinterest irate iregulation. iThe itest ifor isignificance iwas iundertaken iusing ithe iAnalysis iof iVariance i(ANOVA) iat iboth ithe i5% isignificant ilevel iand i95% iconfidence ilevel. iFollowing iinterest irate icaps, ithe icommercial ibanks ihave ishifted itheir irevenue isources iin ifavor iof inon-interest iincome. iThe istudy irecommends ithat ithe icommercial ibanks icome iup iwith iinnovative iproducts iand iservices iso ias ito ilimit itheir idependence ion iinterest iincomes. iThis iis iessential iin iensuring ithat ithey iare ishielded iagainst ithe inegative iimpacts iof ithe iinterest irate iregulations ias iwell ias iassuring iof icontinued iprofitability iregardless iof ithe iregulations. iThe istudy ialso irecommended ithat ithe ibanks ishould ialso iexploit ioperational iefficiency iso ias ito iexpand itheir ifinancial iperformance iand iguard ithe ishareholders icapital.