A Survey of the Application of Term Structure of Interest Rate by Commercial Banks in Kenya

Abstract

Interest rates charged by commercial banks in Kenya are highly unpredictable and volatile. These has elicited sharp reactions most of which is need to place ceiling on the maximum rate of interest that commercial banks will be allowed to charge. There are competing theories of interest rate that tries to explain the behavior or shape of interest curve. My objective was to identify which of the competing theories of structure interest rate mostly used by commercial banks in Kenya. Primary data was collected using likert scale questionnaire and send though emails to respondents. The responses were then analyzed using mean and standard deviation. According to the data analyzed, expectation theory had the least standard deviation thus portrayed consistency across the respondents as a widely used theory to determine the rate of interest by Kenyan commercial banks. Kenyan parliament are continually focusing on setting the ceiling on the rate of interest rate on the basis that they are arbitrary figures arrived at by banks to attain maximum profit on their landings. My project proves the contra, that the rate of interest are arrived at on careful analysis of economic trends, business cycles and other forecast variables of term structure of interest rate. Thus the forecast should be on the commercial banks to best use the term structure of interest rate especially the expectation theory to forecast future rates thus reducing volatility and interest rate risk and advice their clients on the implication of this forecast on their repayment schedule.