Effect of Interest Rate Capping on Loan Volumes of Commercial Banks in Kenya

Abstract

The question of whether shifts in interest rates affect loan volumes of firms have been widely examined in both academic and policy circles and there are proponents and opponents in interest rate capping. This research attempted to find out how capping of interest rate influences loan volumes among banking institutions in the country. It adopted descriptive research design. Intended population was 42 commercial banks authorized by the Central Bank of Kenya. Statistics were scrutinized by means of descriptive, correlation and logit regression analyses. The correlation findings indicated before capping, asset quality and loan volumes of banks are negatively and substantially correlated (r=-0.449, p=000). After the capping, association between asset quality and loan volumes in these institutions remained negative and substantial but increased (r=-0.635, p=000). Logit results indicated a statistically substantial connection between asset quality (p=0.0277, OR=2.212524) and loan volumes of banks. The odds ratio OR=2.212524 implies that there is a significant difference on the effect of asset quality on loan volumes of banks in Kenya a result of interest rate capping. Logit results indicated statistically significant relationship between liquidity (p=0.0021, OR=1.179336) and loan volumes of commercial banks. The odds ratio OR=1.179336 implies that there is a significant difference on impact of liquidity on loan volumes of banks as a result of interest rate capping. The model results indicated a statistically significant relationship between capital adequacy (p=0.003, OR=0.939876) and loan volumes of commercial banks. The odds ratio OR=1.179336 implies that there is a significant difference on the effect of capital adequacy on loan volumes of commercial banks arising from interest rate capping. The study concluded that capital adequacy, asset quality, liquidity influences loan volumes of banks. This research recommends that banks should emphasize on other avenues of conducting business. For instance, leveraging by different product offerings in the market, as well as investing in other ventures to add onto the income from the main business. It will make banks more stable, which will increase the profit margins. The research suggests that banks should utilize existing resources accordingly to boost profit and carry out more functions. These entities ought to comply with existing rules, as established by the supervisory body. It will also reduce instances of having bad loans. The authorities will also be able to access relevant and timely information on banks’ behaviors. This work adds that banking entities should incorporate proper risk managing policies in order to promote profits and reduce risks, subsequently adding more wealth for its shareholders.