The Effect of the Interest Rate Capping on the Performance of Foreign Banks in Kenya

Abstract

This study investigated the effect of interest rate capping on the performance of foreign banks in Kenya. A descriptive research design was adopted in this study. The study targeted all the 14 foreign banks registered and licensed under the Banking Act. Secondary data was used in this study to achieve the set objective. The secondary data was obtained from the financial statements published on official websites of the foreign banks in Kenya as from June 2015 to December 2017. Data was analyzed using descriptive statistics and pair T-test was also applied. Skewness and Kurtosis were used to test the normality of the data. The findings indicated that Capital Adequacy, Asset Quality, Management Soundness, Liquidity and Earnings Capacity for the foreign banks in Kenya had a positive change in the average means after interest rate capping enforcement. This change was found statistically significant for all variables. A statistically significant mean difference was established between average capital adequacy ratio for foreign banks in Kenya before and after interest rate capping. The enforcement of interest rate capping positively influenced the Capital Adequacy ratio to a great extent causing the mean to increase. The study also established that the mean difference between asset quality ratio for foreign banks in Kenya before and after interest rate capping was statistically significant (t (13) = -25.50, p < 0.000). The study further established that the mean difference between average Management Soundness ratio for foreign banks in Kenya before and after interest rate capping was statistically significant. This implies that the increase in average Management Soundness ratio for foreign banks after interest rate capping was influenced by the interest rate capping regulation. A statistical mean difference between average Earnings and Profitability for foreign banks in Kenya before and after interest rate capping was statistically significant hence the finding that the average Earnings and Profitability for foreign banks after interest rate capping was influenced by interest rate capping regulation. The study recommends the banks to innovatively bring in products that yield an income to the bank as opposed to relying on the interest income alone. Relying on the interest income has seen a reduction in income received by the banks and thus lowering the return on equity. Banks should work aggressively to bring in new products that generate them non-interest income. This study recommends that the law on interest rates capping should be repealed once suitable strategies are put in place to ensure access to credit for many clients hence improving the earning capacity for foreign banks. This study also recommends that the foreign banks in Kenya and the government through the central bank of Kenya should further explore other options of lowering the interest rates other than the capping, as this will improve the affordability and access to credit for most of the population, and this may spur economic growth and push up the profitability of banks in the country. Further research is recommended on other areas affecting the performance of foreign banks in Kenya as compared to interest rate capping. It will ensure that the study assesses the most important factors in the performance of banks.