The relationship between interest rate spread and profitability of commercial banks in Kenya
![Thumbnail](/bitstream/handle/11295/37832/Kibe%20%20Maurice%20M_The%20Relationship%20Between%20Interest%20Rate%20Spread%20and%20Profitability%20of%20Commercial%20Banks%20in%20Kenya.pdf.jpg?sequence=10&isAllowed=y)
View/ Open
Date
2003Author
Kibe, Maurice Mugo
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
This research project sought out to determine the relationship between
interest rate spread and profitability of commercial banks in Kenya.
To achieve this objective, three regression models were developed using
interest rates and profitability data for the period between 1996 and 2002.
Interest Rate Spread was measured by the difference between lending and
deposit rates. The profitability indicators used were the Return on Total
Assets (ROTA), Return on Equity (ROE) and the Net Interest Margin
(NIM).
The study found out that interest rate spread contributes less than 50%
towards the profitability of commercial banks in Kenya. Interest rate spread
explains 38.4% of profitability as measured by NIM, 40.1 % when measured
by ROTA and 43.3% when measured by ROE.
Variations in interest rate spread explain 14.7% of the total variations in the
profitability of commercial banks when measured by NIM, 16.1 % when
measured by ROTA and 18.7% when measured by ROE.
For peer group I, interest rate spread contributes less than 50% towards the
profitability of commercial banks in Kenya when measured using ROT A
and ROE while it contributes 77.9% when measured using NIM.
For peer group 2, interest rate spread contributes less than 50% towards the
profitability of commercial banks in Kenya when measured using NIM
while it contributes to more than 50% when measured using ROTA and
ROE.
For peer group 3, interest rate spread contributes less than 500/0 towards the
profitability of commercial banks in Kenya when measured using NIM and
ROTA while it contributes to slightly more than 50% when measured using
ROE.
For peer group 4, interest rate spread contributes less than 50% towards the
profitability of commercial banks in Kenya when measured using ROT A
and ROE while it contributes to more than 50% when measured using NIM.
This implies that commercial banks will no longer rely on interest rate
spread as their main source of profitability. Commercial banks will in the
long run rely less and less on their traditional intermediation role and instead
move towards other innovative ways of raising fee income.
Citation
Master of Business AdministrationPublisher
School of Business, University of Nairobi