Effect of Interest Rate Spread on Financial Performance of Commercial Banks in Kenya

Abstract

Kenyan Commercial banks have had a period of good returns for the last five years until a law that tried to cap interest rates was passed and assented to in parliament in the year 2016. This has drastically impinged on the Kenyan commercial banks’ performance, with many banks laying off workers and closing branches. The CBK through the governor to the CBK has been vocal in trying to ensure that the capping of the interest rates have been removed. This debate has brought out the importance of the interest rate spread to a commercial bank. The margin between the amount the CBK charges the commercial banks (CBR Rate) and the lending rate by the individual bank. The study therefore focused to verify the bearing of interest rate spread on financial performance of commercial banks in Kenya for a five year period between 2013 and 2017. The study used a multiple regression model to analyze secondary data in order to explore the bearing of interest rate spread on Kenyan commercial banks’ performance. Descriptive research design was used which determine relationships between variables. The investigation considered every licensed commercial bank in Kenya and of which had complete data for the five year period under study. 35 commercial banks were therefore studied that represented a response rate of 83.3%. Data validity was emphasized in which case the use of normality tests and multicollinearity test was undertaken so as to validate data in undertaking a multiple regression analysis. The Pearson’s correlation analysis was undertaken that showed positive correlation between interest rate spread and financial performance. The regression model summary showed a coefficient of determination of 42% and the F test statistics used had F calculated value greater than F critical that led the study to decline the null hypothesis. The significance of the study (p value) was less than alpha of 0.05 which concluded that data was significant. The study therefore found that there existed a positive substantial bearing of interest rate spread on Kenyan commercial banks’ performance.