The effects of lending rate policy on the loan portfolio of commercial banks in Kenya

Abstract

The purpose of this study was to investigate the effects of the lending rate policy on the loan portfolio of commercial banks in Kenya. The lending rate policy was measured by the average annual lending rate of the selected commercial banks. Loan portfolio was composed of the annual average of total loans and advances, loan accounts and nonperforming loans. The study employed a quantitative survey design. Secondary data was collected from the audited financial reports of sampled commercial banks for the period between 2002 and 2011. The data was analyzed using SPSS and the findings were presented in bar charts and tables. The techniques of data analysis included descriptive statistics, correlation analysis, regression analysis and test of autocorrelation. The results of the data analysis indicated that the lending rates had a positive correlation with total loans and advances, total loan accounts and total nonperforming loans. However, only the nonperforming loans had a significant relationship with the lending rates. The main conclusion was that the high nonperforming loans portfolio in the Kenyan commercial banks is as a result of the increasing lending rates occasioned by the increases in the CBR and the high exchange rates. The coefficient of determination indicated that the empirical model had a deficiency of 21.98%. The researcher recommends that commercial banks come up with policies and models that would allow them to reflect the changes in CBR, foreign exchange rates and any other inherent risks in the lending business. Finally, the researcher suggests that a similar study be carried out targetin