Interest Rates Spread and Non-Performing Loans in Commercials Banks in Kenya
Khaduli, Nobert Ojiambo
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The interest rate spread determines the margin of profit between a financial institution and a customer for every transaction in Kenya. Increase in the default rate in Kenya in most of the commercial banks has been realized because of the rate of spread of interest. Reports relating to increase in the default rate in Commercial banks in Kenya have been on the increase. The trend in the percentage of non-performing loans has been on the rise in the period 2013 to 2017. Commercial banks failure and financial crisis in developing countries has been linked with the quantity and the percentage of non-performing loans. Therefore this study aimed to establish the effect of interest rate spread on non-performing loans in Commercial banks in Kenya. The study specific objectives were to determine the effect of deposit rate to determine the effect of lending rate, debt collection costs on commercial bank’s nonperforming loans. Theories such as adverse selection finance intermediation theory supported the study variables. Causal research design was used. The target population of this study was the 43 commercial banks in Kenya and therefore the study adopted a census sampling design since the population was of manageable sizes. Secondary data was collected through the use of secondary data collection schedule. Data used in this study was a panel data and therefore panel regression model was used. Quantitative data analysis was used and descriptive and inferential statistics were used for analyzing the data. Diagnostic tests were done to evaluate the suitability, reliability and accuracy of the model and study variables. The study model was used to present the linear relationship between dependent and independent variables. Secondary data was presented by the use of tables and figures. The study found that there was a high variation on lending rate charged by selected banks as evidenced by high standard deviation. The study found that lending rate positively and significantly effect on bank’s non-performing loans in Kenya. Deposit rate significantly affected the changes on non-performing loans in commercial banks in Kenya. The study findings indicated that debt collection costs have insignificant effect non-performing loans. The study concluded that a positive change in lending rate result to a positive change in non-performing loans. The study findings concluded that a positive change in deposit rate would result to a positive change in non-performing loans. The study suggested that CBK adopt a policy for the management of the credit rate and deposit rate for an improved loan ratio.