The impact of interest rate volatility on borrowing from commercial banks in Kenya (1997-2004)

Abstract

The research project provides a comprehensive analysis of the relationship between prevailing lending interest rates and the volume of borrowings. Data relating to prevailing lending rates and the volume of borrowings for the period of 1997 and 2004 was collected and analysed. The general objective of the study is to investigate the extent that borrowings respond to interest rate fluctuations. The results of the study show that there exits a strong negative linear relationship between lending rates and volume of borrowings. Interest rate are an important factor determining amounts borrowed. Amounts borrowed will increase with declining lending rates, as the private sector will be more willing to take on more credit. The policy lessons that emanate from these results relate to the management of interest rates as a monetary policy tool. Low interest rate policy will stimulate borrowings and consequently spur economic growth. A low interest regime has been associated with economic growth in many countries including Japan, Korea and USA. The study therefore recommends to the monetary authorities to closely monitor interest rate movements. Even when the money market is liberalized and not determined by the government, it should be the responsibility of government agencies to act as market participants in attempts to achieve desired levels.