The Relationship Of Kenya Bank’s Reference Rate On Lending Interest Rates Of Commercial Banks In Kenya

Abstract

The research sought to determine the relationship of KBRR on lending interest rates of commercial banks in Kenya. Research used a descriptive research design to achieve the research objectives. Multiple regression analysis was used to determine the relationship of KBRR on Lending interest rates of commercial banks in Kenya. The study used Lending rate as the dependent variable while K, KBRR, Deposit Rate, 91-Day T-bill and CBR were the independent variables. The study found that there was a significant relationship of (Beta=0.421, Sig=.0000) of KBRR on Lending rate. „K‟ was found to have significant relationship of (Beta=.611, Sig 0.000) to the lending interest rate. CBR is not significant to lending rate. Generally the lending rates have been increasing despite the introduction of KBRR in 2014.Lending rates have gone as high as 18.3%.Lending rates apt to react in proportion to the increase on KBRR and slowly to the decrease of KBRR by Monetary Policy Committee of the CBK. It is also clear from the findings that lending rate is not pegged on KBRR. The results show that KBRR doesn‟t significantly affect the lending rate of commercial Banks‟ as determined by individual Bank is significant in determining the lending rates. The increased lending rates have brought about the capping of interest rates through Banking (Amendment) Bill 2016 into Law. The Banking Amendment Act,2016 is however silent on the base rate to be used by banks to price their products i.e. whether KBRR or CBR .It is also not clear on the type of loans to be capped and whether the law affects only Banks and, or also affects deposit taking SACCO‟s and micro finances..The coefficient of determination R-squared is substantial (0.948); therefore predictor variables explain about 94.8% of the lending rate by banks. The prediction model appears to be helpful for making decision since the F- value is 0.000.