The Effect of Changes in Interest Rates on the Returns of Stocks of Listed Commercial Banks in Kenya

Abstract

The study aimed at investigating the effect of changes in interest rates on the returns of the stocks of commercial banks listed on the Nairobi Securities Exchange (NSE). The population of the study comprised the six commercial banks listed on the NSE during the entire study period of 2002 to 2011. These banks are Barclays Bank of Kenya (BBK), Housing Finance Corporation of Kenya (HFCK), Standard Chartered Bank of Kenya (SCBK), Kenya Commercial Bank (KCB), National Bank of Kenya (NBK) and National Industrial Credit Bank (NIC). Monthly data on the average 91Day Treasury bill rates and the returns on the stocks of the respective banks were used in the study. Summary statistics, correlation and regression analysis were applied to ascertain the relationship between the dependent and independent variables. The findings of the study show that the returns on the stocks of BBK, HFCK and SCBK are negatively related to changes in interest rates while the returns on the stocks of KCB, NBK and NIC are positively related to changes in interest rates. The most significant contribution of this study is the use of data from the developing Kenyan economy in determining the effect of changes in interest rates on the returns of the stocks of commercial banks especially as most studies in this area have concentrated on the developed economies.