Interest Rate Capping and Share Price of Kenya Commercial Banks Listed in Nairobi Securities Exchange

Abstract

The study examined the effect of the interest rate capping on the share price of Kenya commercial banks listed in the Nairobi securities exchange. The control variables of the study were dividend yield, inflation rate, profitability, exchange rates and GDP growth. The study was anchored on three theories, namely, the efficient market hypothesis, arbitrage pricing theory and behavioral finance theory. The panel research design was adopted in this study. The panel research design was best suited since panel data was used. The study used secondary data obtained from the NSE market reports, NSE handbook, CBK reports and the individual banks' annual reports. The targeted population of the study was 11 commercial banks listed in the Nairobi stock exchange. The data examined in the study was collected between 2015 and 2021. STATA software was used to generate a quantitative report for analysis. The quantitative report was analyzed using descriptive and inferential statistics. The study findings indicated that interest rate capping, profitability (ROI), dividend yield, inflation, exchange rates and gross domestic product explain 65.03% of the variations in the share price. The correlation result showed that inflation, profitability (ROI) and gross domestic product are positively associated with share price (0.2162; 0.4213; 0.7301, respectively), while Interest rate capping, dividend yield and exchange rates are negatively associated with share price (-0.1174; -0.3526; -0.2265 respectively). The regression results showed that interest rate capping has a negative and significant effect on share price (β=-5.2962, p=0.0040). The dividend yield is negatively and significantly related to share price (β=-1.2822, p=0.0210). Inflation has a positive and insignificant effect on share prices (β=2.7726, p=0.280). Profitability (return on investments) is positively and significantly related to share prices (β=3.2573, p=0.0060). The exchange rates is negatively and insignificantly related to share prices (β=-0.0162, p=0.9570). The study found that gross domestic product is positively and significantly related to share prices (β=11.2161, p=0.0000). The study concluded that interest rate capping, exchange rates and dividend yield are negatively related to share price while inflation, profitability and gross domestic product are positively related to share prices. The study recommended that interest rate capping should not be introduced in a country since it affects the share prices negatively. The Central bank of Kenya should mutually agree with the commercial banks to ensure the customers are not exploited by the commercial banks by charging exorbitant interest rates instead of putting the interest rate capping. Moreover, it is recommended that commercial banks in Kenya look for strategies to increase profitability as it influences share prices. It is recommended that the government use various economic stimulus programs to boost the country's gross domestic product, as this will positively influence investment in the banking sector.