| dc.description.abstract | It is widely believed that fluctuations of market interest rates exert significant influence
on the activities of commercial banks. The effect of interest rate spread changes on
banks’ profitability is shown to be asymmetric with the effect originating from lending
rates being greater than those of deposit rates. The objective of this study was to
determine the relationship between interest rates spread and the performance of
commercial banks in Kenya. This was a census study of all registered 43 commercial
banks in Kenya and relied heavily on documentary secondary data for 6 year study period
(2007-2012). The study found that interest rates spreads are higher for larger banks than
for medium and small banks. On average, small banks have lower spreads. This could
possibly be due to the fact that small and low-capitalized banks find it relatively difficult
to raise funds and have to increase their deposit rates to attract funds and compensate for
the perception that they are more risky relative to large, more liquid, well capitalized
banks that are perceived to be ‘too-big-to-fail’. If the higher spreads are merely
interpreted as an indicator of inefficiency, one can easily be tempted to conclude from the
positive relationship between bank size and interest rate spreads that big banks are less
efficient, which may not necessarily be the case. The results are not surprising given that
big banks are associated with market power—they control a bigger share of the market
both in terms of deposits and loans and advances. The study concludes that there is a
positive linear relationship between interest rate spread and financial performance
(ROA). The study recommended that a study should be carried out in other commercial
banks across East Africa and beyond and see whether the same results would be
replicated. | en |
