The Effect Of Bank Lending Interest Rate On Financial Performance Of Commercial Banks In Kenya

Abstract

The study investigated how Kenyan commercial banks’ profitability is affected by lending interest rates of banks. The objective was based on how bank internal conditions, regulatory conditions, political conditions and macroeconomic variables affect commercial banks’ financial performance. Dynamic panel data was used instead of static model in order to cater for the lag dependent variable. Generalized Method of Moments (GMM) was used to lagged profits which have an effect on the current profits. It also eliminates the issue of endogeneity. Bank lending interest rates affects how banks perform negatively or positively. The study’s empirical findings pointed out that, lending rates of interest contained a negative statistically significant effect. This study therefore recommends that bank management should evaluate their lending rates so that they can have enough loan disbursement but also high returns to improve their profitability. Additionally, they can focus on other factors such as bank internal conditions, political conditions and regulatory conditions that enhance their profitability other thanbank lending interest rates.The government can also establish a proper way of calculating the GDP since there is no clarity on the same.