Effect of interest rates spread on the financial performance of commercial banks in Kenya

Abstract

Interest rates are fundamental to a ‗capitalist society‘ and are normally expressed as a percentage rate over the period of one year. Interest rate as a price of money reflects market information regarding expected change in the purchasing power of money or future inflation (Ngugi, 2001). Interest rate spread is defined by market microstructure characteristics of the financial sector and the policy environment. The objective of this study was to establish the effect of interest rates spread on the performance of commercial banks in Kenya. The descriptive research design was applied. The target population of the study was all the 43 commercial banks in Kenya. The study used secondary data sources to gather information relevant in reaching at the research objectives. The secondary data was collected from the CBK offices on their annual reports on the macro-economic indicators and Kenya National Bureau of Statistics (KNBS) offices. The secondary data on financial performance of commercial banks was analyzed from 2007 to 2011. Regression analysis was used to analyze the data and find out whether exists a relationship between interest rate spread and the performance of commercial banks in Kenya. The study found that there is strong relationship between financial performance of commercial banks with interest rate spread, default risk and inflation. The study recommends there is need for government to regulate the inflation rate in the country and interest rates as this would help commercial banks to operate in stable environment and safeguard borrowers from exploitation by commercial banks.