Fiscal Deficit on Cost of Credit: Does It Matter? Insights from Selected Listed Commercial Banks in Kenya
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Date
2025-09
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International Academic Journal of Economics and Finance
Abstract
The banking sector is an integral player in any economy due to their role in financial intermediation. They collect surplus cash from savers and redistribute to borrowers. However, commercial banks have consistently suffered poor performance arising from high cost of credit. The exorbitant cost of lending has led to an enormous rise in non-performing loans during 2002 to 2023, which adversely impacted banks’ profitability. The study primarily aimed at examining the effect of fiscal deficit on lending costs for a subset of Kenyan Nairobi Stocks Exchange (NSE) listed commercial banks. The study was anchored on the Keynesian liquidity preference theory. A census of Kenya's NSE listed twelve commercial banks was the descriptive survey research design’s main focus. Using a secondary data collection sheet, the review amassed secondary data from 2007 to 2023 spanning 17 years. Pearson's correlation coefficient, panel multiple regression analysis, and descriptive statistics (mean score, frequencies, standard deviation, minimum, and maximum) analyzed data. Tables were used to display the results. The corrected Rsquare value demonstrated that fiscal deficit explains a substantial share of fluctuations in borrowing costs. Regression analysis evidenced that fiscal deficit positively and significantly influenced costs of credit. The review therefore concluded that fiscal deficit when properly managed can reduce the cost of credit thus leading to additional borrowing and economic growth. These results yield critical implications for commercial bank managers, policymakers and researchers. The results indicate that prudent fiscal deficit management is necessary to prevent excessive pressure on credit markets.
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Ndung’u, E. W., Musau, S. (2025). Fiscal deficit on cost of credit: Does it matter? Insights from selected listed commercial banks in kenya. International Academic Journal of Economics and Finance (IAJEF) | ISSN 2518-2366, 5(1), 223-237.