Interest Rate Capping and Performance of Commercial Banks Quoted in Nairobi Securities Exchange, Kenya.
Mwathe, Harun Githua
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This study was carried out in an effort to establish the influence on performance by the law capping rates of interest. Reports from researchers indicated a negative effect on the performance of commercial banks. The CBK which is the regulator of all the banks in Kenya indicated a negative effect on bank results. The interest capping law targeted the major determinants of income by the banks. Lowering interest rates on loans and advances adversely affected interest income and hence the performance. To compound matters, interest rate spread which banks would manipulate in a situation where interest rates on loans decline, was dealt a blow when minimum deposit rates were also initially capped. The study was based on three independent variables and two dependent variables, that is; interest rate charged on loans and advances, minimum deposit rate, interest rate spread and performance in PBTEI and ROE of commercial banks quoted in the NSE respectively. It was carried out over duration of 5 years, from 2014 up to 2018, two and half years apiece during pre- capping and post- capping periods. The current study endeavoured to assess the effects of the law capping interest rates on banks’ performance and was based on three theories. These theories are; financial intermediation theory of banking, modern portfolio theory and Keynes’ theory of interest rate determination. The population that facilitated the research study were the commercial banks that are quoted in Nairobi Securities Exchange. There are a total of 11 commercial banks quoted in the NSE. The research employed a descriptive survey method in this study. A questionnaire to collect data was prepared. A sample of 2 bank employees per bank was selected using the non- probability or purposive sampling method. Qualitative data collected was cleaned, coded and analysed by computer methods. Quantitative analysis of responses from the structured questions was done by employing descriptive statistics. Presentation of results was done using tables, graphs and other data display methods used in statistics. Primary results showed that interest rates on loans, minimum deposit rate and interest rate spread were important in determination of performance by banks at 73.4%, 66.7% and 93.3% respectively. However, regression results showed that interest rates on loans and advances and MDR were not statistically significant at pre capping period while interest rate spread was significant in performance of PBTEI. None of the variables was significant in performance of ROE during pre- caps era. Interest rates on loans and advances was significant to both performance of PBTEI and ROE post capping period and interest rate spread remained significant in performance of PBTEI. Minimum deposit rate was statistically insignificant the entire period. The platforms that hold information on cost of credit by the banks should be always updated and made easily accessible to potential borrowers and the general public. There is need to study the effect of interest capping law on small banks which were not covered in this study since they were not among the listed banks. Since the minimum deposit rate was statistically insignificant in this study there is need for more studies in this area.