Relationship Between Interest Rates Spread and Financial Performance of Commercial Banks in Kenya

Abstract

The banking society in Kenya has experienced regulatory changes for the last five years. The regulatory guidelines are based on interest rates of credit facilitates and deposits interest rates in which a regulated by the interest rate bill 2014 and interest rate bill 2016 through an act of parliament. The bill restricts all commercial banks and other financial institutions to charge interest rate not exceeding 4.00% more than CBK lending rates which stands at 10.00% by August 2016. All financial institutions are in a milestone to maximize on profitability and reduce the operational expenses by considering the interest rates spread. The aim of the study was to establish the relationship between interests spread on Kenya commercial banks financial performance. The population of the study constituents of 43 commercial banks in Kenya although two of the banks where under liquidation (Chase and Imperial Bank) and data was collected from CBK bank survey reports and KNBS economic growth reports from 2008 to 2015. Data analysis was done using SPSS (Statistical Package for Social Science) and presented using tables. All variables regression analysis was done to establish the relationship between the interest rate spread and the performance of commercial banks in Kenya. From the study, it was established that there was significant positive relationship between interest rate spread and financial profitability on operational performance among the licensed commercial banks. Increase of loan disbursement on investors is affected by the interest rate spread which contributes to asset growth and profitability. The study recommends that the regulatory of the banks (CBK) develop monetary policies and guidelines to regulate the interest rates on loans and deposits in order to protect the borrowers from exploitation by the commercial banks.