The effects of liberalizing interest rates on deposits and advances in Kenya

Abstract

Until June 1991, the government maintained control on interest rates and was instrumental to setting the maximum nominal interest rates on loans and minimum interest rates on savings, mandatory credit ceiling, compulsory reserves requirements for the bank and controls over allocation of credit. The study was geared towards establishing the effects of interest rates on deposits and advances as well as coming up with a trend for interest rates for the period before and after liberalization. The data was obtained from statistical bulletins published by the CBK for the period 1987-2007. It was subjected to linear and non-linear regression procedures to determine the relationship and effects of deposits, advances and the risk free rate on the deposit and lending rate. It was established that for both regimes a positive correlation existed between deposits, risk free rate, advances and the deposit and lending interest rates that is as one rises the other rises too. However for the period before liberalization there was a more significant relationship as opposed to the period after. It was recommended that adopting the regulatory regime in Kenya will have more impact in pursuing the objective of increasing deposits and advances in real terms. This was supported by the strong positive correlation for the period before liberalization. -.