Determinants of long term interest rates in Kenya
Real long-term interest rates are key determinants of longer-term saving and investment decisions, while their influence on business spending, household investment and the consumption of durable goods plays a key role in the business cycle and transmission of macroeconomic policies. The study of long term interest has become a significant global issue after the global financial crisis of 2008. This study therefore was conducted with the objective to establish the determinants of long term interest rates in Kenya. The study sourced data from secondary sources. The data was obtained from CBK, NSE and World Bank website for which data from 2002 to 2012 was obtained. The data extracted included central government debt, inflation rates, external debts and the interest rates. Data analysis involved preparation of the collected data, coding, editing and cleaning of data in readiness for processing using SPSS and Microsoft office excel. In the analysis, multiple regression analysis was used to determine the relationship between long term interest rates and the determinants. The study has established that long term interest rate is influenced by the annual inflation rates, the external debt and the central government debt. The results in the study findings indicate that there is a direct positive relationship between the long term interest rates and the determinants (annual inflation rate, central government debt and the external debt). An increase in these determinants leads to an increase in the long term interest rates. This study highly recommends to the potential investors in companies to use the Altman failure prediction model as an assessment tool. The results could raise certain questions about the state of a company and could ultimately result in an investor investing or purchasing a company that is profitable and well managed company since declining Z-score values depicts a failing company. The study recommends that the government of Kenya should reduce on the foreign borrowing in order to reduce the long term interest rate in the country to encourage local investment that will see the country finance most of its activities through internal borrowing. The study also recommends that the government of Kenya should establish price regulation law to the prices of the basic commodities to curb the ever rising inflation rates in the country that results in rise in the interest rate which in turn discourages borrowing by the people.