The Effects of Interest Rate Capping on Share Returns of Commercial Banks at the Nairobi Securities Exchange

Abstract

The study evaluated whether returns to stocks of commercial banks trading at the Nairobi Securities Exchange were majorly impacted by interest cap law. The study is based on asset pricing traditional theories such as; Arbitrage Pricing theory, Efficient Market Hypothesis theory and Rational Expectation theory. Observational study type was adopted with study’s target population involving commercial banks trading shares at the NSE. The listed commercial banks are 11 in total. This paper utilized secondary data. Secondary data gathered comprised of daily share prices, Nairobi Securities Exchange All Share Index for. The information covered a period of fifteen days, that is, seven days before and seven days after the event. The data was sourced from Nairobi Securities Exchange. Data collected was evaluated using measures of central tendency and dispersal, trend analysis, paired t-test and fixed effect regression model using STATA. The paired t-test test showed that the returns of stocks of concerned commercial banks was significant given that there was a major difference in the mean AR pre and post interest cap. The ANOVA also showed that returns of stocks of commercial banks that were trading at the NSE were strongly explained by interest cap event in the events window of seven days before and seven days after the interest cap. Finally, the regression coefficients showed that the returns of the concerned commercial banks were majorly affected by the introduction of interest cap. The study thus concluded that the returns of stock of concerned commercial banks as measured by absolute returns had changed significantly from the time the news was announced of the president signing the bill into law. The returns of stock of commercial banks trading at the NSE were majorly explained by interest cap and that the returns of individual stocks deviated more away from the market returns in the post interest cap days than pre-interest cap days. The study recommended that commercial banks should lend more to the government through purchase of treasury bills and bonds that are not affected by the interest cap. Further, the investing public who hold stocks of commercial bans trading at the NSE should consider offloading such stock. Finally, the government through the legislature should avoid introducing interest caps in Kenya given that such regulations affect the business environment by discouraging commercial banks to lending to the SMEs.