| dc.description.abstract | Efficiency in the banking sector is recognized by the Central Bank as a precondition
for macroeconomic stability and is important for effective monetary policy execution.
Further, a banking sector’s ability to allocate credit efficiently pegged on economic
fundamentals is expected to have positive implications for economic growth. These
preconditions were, however, not a solid determinant of anticipated efficiency in the
Kenyan banking industry owing to unpredictability of lending-rate flexibility. Based
on the aforementioned, this study sought to investigate the factors that influenced
commercial bank rate adjustment disparity with what the Central Bank of Kenya
would expect after variation of the Central Bank Rate and Cash Reserve Ratio.
The study used secondary data which was collected from the Central Bank of Kenya
and the Kenya National Bureau of Statistics, and on whose basis comparisons were
made with reference to the Non-Performing Loans, Operating Costs, Industry Return
on investment, and Overall Gross Domestic Product. The analysis was done using
descriptive statistics and regression analysis with the aid of SPSS for Windows V.20.
From the resulting regression model, non-performing loans, operating costs and
industry profits had a positive influence on disparity between the central bank rate and
commercial banks lending rate at 3.14, 1.75 and 2.25 unit times respectively. On the
other hand, gross domestic product had little and negative influence on commercial
rate adjustment. That is, an increase in gross domestic product did not significantly
trigger commercial banks’ adjustment of interest rate, and if it did it was to the
opposite direction. This meant that there was a significant relationship between non-
Performing loans, gross domestic product, operating costs and return on investment,
and the trend of disparity between the central bank rate and commercial banks lending
rate in Kenya.
Based on the findings, it was recommended that there was need for an interventionary
move by CBK to translate the industry’s recovery effectiveness to optimal credit/loan
costing and shielding of existing contracts from re-pricing. Also, despite the high target
liquidity mopping indices, the pre-existing bank debtors should be insulated
from unanticipated increases in order to protect their investments while sustaining
their repayment abilities. While banks were encouraged to expand and provide
advanced services to the public and even beyond the republic, there was little sense in
allocating the financing burden to the borrowers through higher interest rates. There
was need for commercial banks need to be extremely innovative by broadening their
banking products so that options of enlarging lending rates far adrift the CBR were
made secondary as opposed to being primary. Finally, it was recommended to the
responsible authorities to bolster the country’s economic pillars which in turn would
trigger the “hidden hand” industry stabilization. | en |
