Interest Rate Spread and Financial Inclusion Nexus in the East African Community
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Date
2022Author
Gitiri, Elizabeth K
Type
ThesisLanguage
enMetadata
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Despite a steady growth in financial inclusion in terms of the accessibility, other indicators particularly the usage is still low. About 60 percent of people in the East African Community region are excluded from using bank services such as loans and other credit facilities. This is highly accredited to the rising cost of borrowing. Interest rate rates have been on the rise around the region leading to high interest rate spreads of an average of 12 percent around the region in the financial year 2021. The objective of this study was to examine the nexus of interest rate spread and financial inclusion. To achieve this, this study hypothesized that interest rate spread is an endogenous variable that is affected by several bank specific factors such as the widespread level of Non-performing loans that the banks face, operation costs and the liquidity ratio of the bank which denotes the ability to liquidate its assets in the event it goes under. In light of this the study took this into account and adopted a two stage Generalized Methods of Moments approach to model the relationship and interactions of the variables. From the first stage analysis, the study established that NPL is positively associated with interest rate spread (=0.034, p-value=0.011). This study also concluded that the relationship between liquidity ratio and interest rate spread was a negative one ( = -0.124, p-value=0.079). From the second part of the modeling, this study obtained positive yet statistically significant coefficients for the lag of financial inclusion (=0.65, p-value=0.018). This study also obtained negative and statistically significant coefficient for interest rate spread (=-3.826, p-value=0.000). The study concluded that interest rate spread has a negative relationship on financial inclusion within the East African Community. The study recommends that, to address the interest rate problem there is need to address the factors that contribute to increases in the interest rate spread. Firstly, there is need for East African banks to institute seamless internal risk systems to ascertain the credit worthiness of borrowers. It can be accomplished through adoption of digital technologies across the loan value chain. This will aid in curbing non-performing loans problems that are
quite rampant in the banking sectors. Secondly, it is imperative for banks to strive to increase their liquidity ratios in order to reduce interest rate spread. This can be achieved through the liquidation of the unneeded assets through disposing them off. This can also be achieved through proper management of overheads.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1411]
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