The Effect of Selected Interest Rate Determinants on the Quality of Credit Portfolio Offered by Listed Commercial Banks in Kenya
Abstract
Commercial banks' capacity to advance sustainable loans to their clients depends on the
quality of their credit portfolio. While monitoring the quality of a commercial bank's
credit portfolio continues to be challenging, the performance of most commercial banks
globally depends on how well they manage their biggest asset-loans. The quality of the
credit portfolio that commercial banks offer is influenced by factors such as interest rates.
The objective of the study was to determine the effect of selected interest rate
determinants on the quality of credit portfolio offered by listed commercial banks in
Kenya. The study used the cost of borrowing, capital adequacy and BOPO (operating
cost to income ratio) as the independent variable while credit portfolio quality as the
dependent variable. The study employed descriptive research design to establish if there
is a statistical link or correlation between variables with little or no effort to control
extraneous variables. Twelve listed commercial banks formed the population sample, but
data was only available for 11 banks. Correlation analysis revealed a positive and strong
correlation between the operational cost to income (BOPO) and credit portfolio quality.
At the same time, the findings indicated a strong negative correlation between capital
adequacy and credit portfolio quality. Interest rate (cost of borrowing) had a positive but
weak correlation with the quality of the credit portfolio. The regression results show that
interest rates have no significant effect on the credit portfolio quality, while BOPO and
capital adequacy significantly affect the credit portfolio quality. BOPO and capital
adequacy also exhibited positive and negative relationships with the credit portfolio
quality, respectively. The findings also indicated that the independent variables explained
51.5% of variations in the quality of the credit portfolio. The regression model was also
fit since the p-value was 0.00. It is therefore recommended that banks raise their core
capital base since the capital adequacy measure revealed that banks with high capital
improve the quality of their credit portfolio. Further, banks need to maximize operating
income to keep their BOPO ratio within manageable limits.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1521]
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