Determinants of lending rates of Commercial Banks in Kenya

Abstract

The factors that determine the level of commercial bank lending rates are important concerns to policy makers, the banking industry and the public at large. The market for commercial loans from commercial banks is competitive and rates on these loans have tended to respond to reductions in deposits rates and other costs. This study sought investigating determinants of lending rates in commercial banks in Kenya by answering the questions, what are the determinants of lending rates of commercial banks in Kenya .The main objective of the study was to establish factors determining lending rates of commercial banks in Kenya. This study used a descriptive survey. The population of this study consisted of all 44 commercial banks in Kenya and therefore carries out a census survey. The study used both primary and secondary data sources in gathering data for analysis. The primary data was collected using semi-structured questionnaires. Data presentation was done by the use of pie charts, bar charts and graphs, percentages and frequency tables. The inferential statistic regression and correlation was done to establish the extent to which commercial banks determine factors influencing lending rate The study concluded that cost of fund (loans) determine by Taxation Costs of provisioning ,core liquid asset requirement, transaction costs, Central Bank of Kenya supervisory fee , cost of capital (return on equity) greatly influenced determination of lending rate in commercial bank. The study concluded that other costs that determine the lending rate of commercial banks included the Statutory reserve requirement , Management fees , Staff costs and weighted average deposit rate ,reserve and liquidity requirements and mandatory investment levels required by the Central bank of Kenya . The study concluded that inflation conditions, and market factors such as interbank rate, competition among Interbank rate, credit risk premium due to various risks, including interest risk, credit risk, foreign exchange risk and legal risk, as well as demand and supply, Industry trend and that Policy rate that was linked to the Open Market operations influenced determination of lending rate of commercial banks