Effects of Lending Interest Rates on Financial Performance of Commerical Banks in Kenya

Abstract

The main purpose of this research was to establish the effect of effects of interest rate on the financial performance of commercial banks in Kenya. The study used qualitative research design. The sample size of the study constituted all the 44commercial banks in Kenya. Data for the study was obtained from audited financial statements of the commercial banks involved in the study. The results from the regression analysis indicated that only 62.14 percent of variations on financial performance of commercial banks in Kenya could be attributed to determinants such as interest rate, size of the commercial banks and management efficiency and the remaining portion being influenced by other factors. This study further revealed that the determinants such as interest rate, size of the commercial banks and management efficiency were directly related to financial performance among commercial banks in Kenya as was measured by the Return on Assets. This implies that effective management of interest rate spread determinants can be implemented to improve levels of interest rate spread determinants. Multiple correlation analysis was performed with each of the unique models to examine the significance of relationship amongst the various independent variables and the dependent variable. All the variables were incorporated in one model, multiple correlations co-efficient was observed.The raw data obtained from financial reports of the commercial banks under study were analyzed using Ms Excel spreadsheets after which regression analysis was performed. Ordinary Least Square (OLS) regression found that interest rate had a positive relationship with the financial performance of commercial banks in Kenya. The findings from the study confirmed that interest rate, size of the commercial banks and management efficiency had varying degrees of relationship with the financial performance of the commercial bank in Kenya. The study revealed that interest rates positively influenced returns of the commercial banks in Kenya. The study also established that commercial bank size was positively correlated with the financial performance of the commercial banks in Kenya. Management efficiency negatively influenced the financial performance of commercial banks in Kenya. This study therefore recommended that the commercial banks should handle their management efficiency and their assets appropriately as the changes in management efficiency affect the performance of the commercial bank.