Relationship between interest rate spread and financial performance of the commercial banks in Kenya

Abstract

The research aims at contributing to the growing number of studies on banking performance by attempting to introduce the interest rate spread as one of the factor behind financial performance in the banks . Interest rate spread is defined by market microstructure characteristics of the banking sector and the policy environment. Risk-averse banks operate with a smaller spread than risk-neutral banks since risk aversion raises the bank’s optimal interest rate and reduces the amount of credit supplied. Widening interest rate spread in Kenya has been widening following interest rate liberalization characterized by high implicit costs with tight monetary policy achieved through increased reserve and cash ratios and declining nonperforming loans. This study sought to establish the relationship between interest rate spread and financial performance of the commercial banks in Kenya. This study adopted a descriptive research design on a sample of quoted commercial banks in Kenya. The study used secondary data, collected from Bank Supervision Report. The study used quantitative techniques in data analysis to the relationship between the interest rate spread and performance of commercial banks. The data is presented using tables