The relationship between interest rates and financial performance of commercial banks in Kenya

Abstract

This study set out with an objective of establishing the relationship between interest rates and financial performance of commercial banks in Kenya. To achieve the objective of the study regression models were developed using financial performance as the independent variable and interest rates as dependent variables. In the model ROE was defined as the profitability indicator. Secondary data was collected from published reports for a period of five years between 2006 and 2010. The findings and analysis reveal that interest rates have an effect on financial performance of commercial banks in Kenya. The study used regression analysis to establish the relationship between interest rates and ROE. The results obtained from the regression model shows that there is a positive relationship between interest rates and financial performance of commercial banks in Kenya. Banks should therefore prudently manage there interest rates to improve their financial performance. The analysis shows that the effect of interest rates on profitability is not significant in the short term for all the banks. In view of this the other factors which influence profitability needs to be enhanced to improve the financial performance of commercial banks in Kenya.