Interest Rates Capping and Credit Uptake of Commercial Banks in Kenya
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Date
2023
Authors
Moenga, Mamboleo Kepha
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
In 2016, Kenya enacted the Banking (amendment) Act 2016 which allowed lending interest
rates charged by Commercial Banks in Kenya to be fixed at the Central Bank Rate plus a
spread of 4% and deposit rates at 70% of the Central Bank Rate. Many banks protested this
move since it meant reduced profitability. As a result, commercial banks introduced
stringent credit qualification criteria locking out many borrowers who would have
otherwise qualified for credit. This situation led to reduced credit uptake, especially
unsecured loan facilities. Therefore, this study sought to establish how interest rate capping
affects credit uptake of Commercial Banks in Kenya. The objectives of the study were; to
determine the effect of capping lending interest rates on credit uptake of commercial banks
in Kenya; to establish the effect of capping deposit interest rates on credit uptake of
commercial banks in Kenya; to investigate the effect of deposit interest rate spread on credit
uptake of commercial banks in Kenya and; to determine the moderating effect of inflation
risk premium on the relationship between interest rate capping and credit uptake of
commercial banks in Kenya. The study was guided by four theories namely: Irving Fisher's
Theory of Interest Rates, the Fisher Effect, Loan Pricing Theory and Loanable Funds
Theory. The study conducted diagnostic test on multicollinearity normality test and
Heteroscedasticity test. The study adopted descriptive research design. The target
population for the study was all the 40 licensed commercial banks in Kenya. The sampling
frame for the study was all (40) licensed commercial banks in Kenya. This study collected
both primary and secondary data because both data reinforced each other. Primary data
was collected using semi-structured questionnaires, while secondary data was collected
from audited and released financial statements of Commercial Banks in Kenya for the
period 2014–2019. A pilot test was conducted to determine the validity and reliability of
data instruments. The collected data was cleaned, coded and analyzed using SPSS. The
data was analyzed using multiple regressions and descriptive statistics namely: mean
median, mode and standard deviation. Quantitative data was presented using tables, pie
charts and bar graphs while qualitative data has been presented descriptively. The study
established that while capping lending interest rates and interest rate spread had a
significant effect on credit uptake of commercial banks in Kenya, capping deposit interest
rates was insignificant and the relationship was significantly moderated by inflation risk
premium. The study concluded that interest rate spread had the largest effect on credit
uptake of commercial banks in Kenya followed by capping lending interest rates and lastly
capping deposit interest rates. The study recommends that when formulating policies on
interest rate capping, the Central Bank of Kenya should focus more on the lending side as
compared to the deposits side. The Monetary Policy Committee of the Central Bank of
Kenya should implement sound monetary policies to stabilize the level of inflation so as to
promote credit uptake among commercial banks in Kenya.
Description
Kenyatta University
Keywords
Interest Rates Capping, Credit Uptake, Commercial Banks in Kenya