The Effect of the Base Lending Interest Rate on Loan Repayment in Kenyan Commercial Banks

Abstract

A decrease in the base lending rate will lead to a subsequent decrease in the lending rate of banks thus resulting in the decrease of loan defaults. The fluctuations in the base lending rate have therefore occasioned subsequent fluctuations in loan repayments over the years. The objective of this research was to assess establish the effect of the base lending rate on repayment of loans in Kenyan commercial banks. It also aimed at reviewing the increasing body of theoretical and empirical studies that have endeavoured to examine the range of magnitude and relations between interest rates and loan repayments. The target population was all the 42 licensed commercial banks. Secondary sources of data were employed. Longitudinal data was utilized, data was collected for the macro-economic phenomena over a varying time periods. The research employed inferential statistics, which included correlation analysis and multiple linear regression analysis so as to establish the effect of the base lending rate on loan repayment. Additionally, control variables entailing economic growth, inflation, and exchange rate fluctuations were utilized. The study findings were that only inflation is significantly associated to loan repayments, they had a significant negative association. Additionally, the study findings revealed that the model consisting of the base lending rate and the control variables entailing economic growth, inflation, and exchange rate fluctuations, does not significantly impact on loan repayments. Further findings were that the base lending rate, inflation, and exchange rate fluctuations had significant relationships with loan repayments. They all had significant negative effects on loan repayments. Policy recommendations are made to the National Treasury and CBK they should utilize the CBR, in addition to it being an open market operation tool, to mitigate non-performing loans in the financial sector. Additionally, the policy makers should control inflation and exchange rates in order to mitigate non-performing loans in the financial sector. Reccomendations were made to commercial bank practitioners, and by extension other financial institutions practitioners and consultants to gauge the macroeconomic environments when issuing out massive loans in order to mitigate defaults.. However, the commercial bank practitioners, and by extension other financial institutions practitioners and consultants need not consider economic growth when making credit disbursement decisions.