The Effect of Commercial Bank Lending Interest Rate on Economic Growth in Kenya

Abstract

Banks have the responsibility of determining set the base rate and therefore shape the interest rate in Kenya, which is equivalent to the CBK rate. (Panizza & Presbitero, 2014), argue that interest rate landscape is vital in the profitability of any business. The CBK influences the performance of all sectors by setting the bank rate and monetary policy. Many of the studies that have been undertaken have concentrated on a given sector. There have been insufficient studies conducted on the economy at large. This research focuses on satisfying the gap that prevails. Its goal is to investigate the effect of lending interest rate on economic growth in Kenya and the empirical studies that assist in responding to the research objective. I obtained data from the KNBS and from the Central bank of Kenya for duration of 10 years ranging from 2008 to 2017 and in the same light; the data was regressed quarterly to assist in addressing the concerns. The research indicated that there is an indirect correlation between interest rate and the economic growth. Apart from the main variable under study, the lending interest rate, the study incorporated other variables like exchange rate and inflation rate. The study went further to determine their relationship to economic growth. It is critical for the government establish policies that regulate the lending interest rate since it is a significant factor in determination of economic growth. The study also investigated the behavior of exchange rate and inflation rate in relation to economic growth.