The effect of interest rate variations on the financial performance of commercial banks in Kenya
Financial systems should promote economic growth by diversifying all aspects of an economy, be it accomplishing portfolios or even meeting liquidity requirements for financial institutions. In Kenya, the central bank recognizes efficiency in the banking sector as the precondition for macroeconomic stability and the existence of effective monetary policy execution. In Kenya the interest rate have been varying greatly affecting the Financial Performance of banking institutions. The objective of this study was to determine the effect of interest rate variation on the Financial Performance of Commercial Banks in Kenya. A descriptive design was used in this study, to show trends and comparative analysis of the Interest Rate Variations over the years. All 42 operational Commercial Banks in Kenya as at the year 2015 were considered. Therefore, a census will be used. To achieve the objective of this study, secondary data sources were used to gather information. The study covered a period of 10 years, from the year 2006 to 2015. The data obtained from the secondary sources was analyzed using statistical package for social sciences (SPSS). The findings on the regression coefficients established that interest rate variation had an insignificant positive relationship with the Financial Performance of Commercial banks but a negative relationship was witnessed in the case of credit risk and inflation. The findings also established an insignificant positive relationship between GDP growth and Financial Performance of Commercial Banks. The study concluded that interest rates variation, credit risk and inflation have an inverse relationship with Financial Performance of Commercial banks while GDP growth rate has a direct relationship with the Financial Performance of Commercial Banks in Kenya. The study recommended that Commercial Banks in Kenya should come up with appropriate strategies on Interest Rate Variation and Credit Risk to ensure that they do not reduce their Interest Income hence Financial Performance.
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