Bank Characteristics, Macroeconomic Variables and Lending Rates Among Commercial Banks In Kenya

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Mokaya, Maubi Andrew
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Kenyatta University
The banking system is considered a key component in provision of funds for economic development through financing capital accumulation, technological innovations, productivity growth and enhancing other sustainable economic growth rates and consumption. Pricing of funds through lending rates and efficient banking systems are essential for acceleration of economic growth. This would spur economic growth and enhance the financial sector development. Lending rates in Kenya have been high for a long time and various efforts have been made to arrest the situation over time notably: Introduction of the KBRR by the CBK, attempts to cap lending rates in 2010 by the Kenya National Assembly and finally the enactment of the banking amendment Act of 2016. However, the lending rates still remain high despite capping. Research done on effect of various variables on lending rates has assumed direct relationship and has produced mixed results. This study sought to investigate the effect of bank characteristics and macroeconomic variables on lending rates among commercial banks in Kenya. Specifically the study sought to: establish the effect of bank size, credit risk, and liquidity risk, operating costs, Gross Domestic Product growth rate and inflation rate on lending rates among commercial banks in Kenya. The study further sought to establish the moderating effect of political risk on the relationship between bank characteristics and lending rates among commercial banks in Kenya and to determine the moderation effect of political risk on the relationship between macroeconomic variables and lending rates among commercial banks in Kenya. The research philosophy for this research was positivism. Explanatory non-experimental research design was employed. The target population was thirty nine (39) commercial banks from whom secondary data was collected by way of census since these are the banks from which complete information could be obtained for meaningful analysis for the study period 2006-2015. Descriptive Statistics including Mean and Standard deviation and inferential statistics: Panel regression analysis and Correlation analysis were carried out. Data analysis was run on the Stata 13 package and findings presented in figures, tables, graphs and charts while deriving conclusions and recommendations from the findings of the study. The study found that operating costs, credit risk and inflation had positive effects and were significant determinants of lending rates. However the effect of GDP growth rate and bank size was found to be negative and significant. Political risk was found to have insignificant moderating effect on the relationship between bank characteristics, macroeconomic variables and lending rates among commercial banks in Kenya. Based on the findings, the study concluded that bank size, credit risk, operating costs, GDP and inflation play a significant role in determining the lending rates of commercial banks. The study recommends that government pays attention to macroeconomic variables while controlling the domestic lending rates. The study further recommends that policy initiatives that will help to keep the lending rates at a low level take into consideration the need to enhance economic growth and reduce inflation. The study recommends in conclusion that commercial banks that wish to adjust their lending rates focus on their internal factors such as bank size, credit risk and their operational cost and that the government considers deregulation on lending.
A Thesis Submitted to the School of Business in Partial Fulfillment of the Requirements for the Award of the Degree of Doctor of Philosophy in Finance, Kenyatta University