dc.description.abstract | The capping of the interest rate has resulted to the commercial banks having a poor
financial performance (Aurello, 2015). Following interest rate, capping notable losses
or rather drop in profit has been reported in various countries around the globe by banks.
In fact, the adverse effect brought about by interest rate capping on the commercial
banks performance has seen banks withdrawing and also closing some of their branches
in different region across the world. Banks have chosen to reduce their cost since the
interest capping has had an impact on their revenue in the corresponding countries. The
“objective of the study was to determine the influence of interest rate capping on interest
rate spreads realized by Kenyan commercial banks. It also aimed at reviewing the
increasing body of theoretical and empirical studies that have endeavored to examine
the range of magnitude and effects of the interest rate capping on interest rate spreads
of commercial banks. The target population was all the 42 licensed commercial” banks.
Secondary sources of data were employed. Panel data was utilized, data was collected
for several units of analysis over a varying time periods. The research “employed
inferential statistics, which included correlation analysis and panel multiple linear
regression equation with the technique of estimation being Ordinary Least Squares
(OLS) so as to establish the relationship of the bank specific factors and sharia
compliance, and the financial performance of commercial banks and also to establish
the effect of interest rate capping on interest rate spreads of commercial banks. The
study findings were that interest rate capping, NPL, management efficiency, and bank
size have a significant association with interest rate spreads. Interest rate capping, credit
risk, management efficiency have a negative significant association with interest rate
spreads. Bank size has a positive significant association with interest rate spreads.
Leverage however, does not have a significant association with interest rate spreads.
Additionally, the study findings revealed that interest rate capping and the bank specific
factors do significantly influence interest rate spreads. Thus, they can be utilized to
significantly predict the interest rate spreads of commercial banks. The study findings
also exhibited that only interest rate capping and bank size had significant relationships
with interest rate spreads. Interest rate capping has a significant negative influence on
interest rate spreads whereas bank size has a significant negative influence on interest
rate spreads. Credit risk, management efficiency, and levearage however do not have
significant effects on interest rate spreads. Final findings were that there was a
significant change in the interest rate spread of the commercial banks from before the
interest rate capping legislation was enacted and after it was enacted. Policy
recommendations are made to the National Treasury and CBK to institute interest
capping because it reduces the interest rate spread which has been higher than the
African average. Additionally, the regulator, the CBK, can utilize the CAMEL
framework, which mainly entails the bank specific factors, to gauge the performance
and going concern status of the individual banks. Recommendation were made to the
commercial bank practitioners, and by extension other financial institutions
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practitioners and consultants to employ other strategies to lower the cost of funds in
case of an interest rate capping regime because the lending rate is fixed. Further
recommendations were made to them to” increase bank size in order to augment the
financial institutions’ financial performance. | en_US |