The Effect of Lending Interest Rate on Economic Growth in Kenya
Abstract
According to economic theory the base rate is set by the banks to determine the interest rate
and in Kenya it’s the CBK rate. Darrat and Dickens (1999), argue that interest rate
environment is important in the performance and the returns of any given investment. The
CBK through the monetary policy and the bank rate has a very strong bearing on the
performance of any sectors. Following interest rate liberalization, interest rates have
fluctuated to respond to changes in demand and supply of loanable funds in the financial
market. Various studies have been conducted but they have been sectoral in nature, however
no known study that has dealt on the effects of interest rate on the general economic growth
has been done. This study therefore seeks to fill the knowledge gap that currently exists. It
aimed to establish the effect of lending interest rate on economic growth in Kenya and the
empirical evidences that help answer the research objective. I collected data from the KNBS
and from the Central bank of Kenya for a 10 year period starting 2003 to 2012 and the same
was regressed quarterly to help answer the research question. The study established that there
is a negative relationship between interest rate and the economic growth. Interest rate was not
studied in isolation but there were other variables which were also studied i.e budget deficit,
inflation rate, exchange rate and gross investment whose effect to the economic growth was
also established. Since lending interest has a strong bearing on economic growth, it’s
imperative that the government puts policies in place to check the interest rate. It’s the same
thing for the other variables which were also studied namely; budget deficit, inflation rate,
exchange rate and gross investment.
Citation
Department of Finance and Accounting,Publisher
University of Nairobi
Description
Thesis