The effect of interest margins on profitability of commercial Banks in Kenya

Abstract

Despite the removal of restrictions and reforms in the banking sector to facilitate the adoption of a market oriented interest rate policy, interest rates are yet to become fully responsive to the market. The Central Bank of Kenya as the regulatory authority of the country‟s banking and financial system has been urging the banks to reduce the interest rate spread (IRS) in a rational manner. Despite these efforts, the IRS has remained high in the banking sector of the country. The objective of the study is to determine the relationship between interest margins and profitability of commercial banks in Kenya. This study adopted an explanatory approach by using panel research design to fulfill the research objective. The population of this study comprised of all licensed commercial banks in Kenya between the period of 2006 and 2010. A sample of 35 banks was selected for the study. The study employed secondary data. The data was collected from the Central Bank of Kenya and Banking survey 2010. The collected data was analyzed using descriptive statistics, graphs, multiple linear regression analysis and inferential statistics