Effects of Foreign Direct Investments on the Interest Rate Spread Among Listed Kenyan Banks

Abstract

Foreign direct investments have been associated with the streamlining the local economy, through provision of new technology, providing increased employment opportunities as well as enhancing that provision of exemplary and unique services that the local economy would not obtain the expertise or the resources to undertake. However, FDI inflows on the other hand, means that the local industry is faced with stiff competition and may be required to increase their investments and their standards, to compete with the multinational companies. The increased borrowing of funds is expected to increase demand for loans and increase interest rate spread. This study therefore sought to determine the effect of FDI on interest rate spread in Kenya. These factors included, inflation rate, real interest rate, GDP and exchange rate volatility. Quarterly data for these variables was collected for the period of 10 years (2012-2022). The study adopted correlation analysis as well as regression analysis that sought to determine the relationship between the study variables. The regression analysis that was undertaken by the study indicated that FDI had significant negative effect on interest rate spread. The Spearman’s correlation that was undertaken by the study was -0.05, but insignificant. The regression analysis however indicated that FDI had a significant coefficient of -0.494. The correlation coefficient of inflation rate with interest rate spread was negative and close to zero at -0.034. This indicated that increasing inflation rate would reduce interest rate spread, although the correlation was insignificant. Real interest rates, however, did not have significant effect on interest rate spread. The regression coefficient had a p-value greater than 0.05 and therefore despite the coefficient being negative indicating that increasing real interest rates would have a negative impact on interest rate spread, the impact was not significant. Increasing GDP in the economy increased economic activity and therefore less people need to borrow loans from commercial banks. The xii

commercial banks, therefore, reduce their interest rates, and thereby reducing the interest rate spread. The regression analysis had a similar finding where the coefficient of GDP was significant but negative at -1.17. Exchange rate volatility on the other hand measured the exchange rate between the Ksh and USD. The volatility had negative and insignificant correlation while at the same time the regression coefficient was negative and insignificant. The study recommended that the government improves FDI inflows, as well as enhance opportunities that would improve GDP. Inflation rate in the short run was also encouraged and recommended by the study.