Interest Rates Under the Treasury Bill Regime: Potential Implication on the Financial Performance of Commercial Bank

Abstract

This study set out to achieve the following objectives. The potential impact of the Central Bank of Kenya (Amendment Act) on the financial performance of commercial banks and whether performance depends on size of the bank. Though the CBK(Amendment)Act was declared null and void in February 2002,as it had ex post facto(retrospective ) operations contrary to Sec 77(4)of the constitution, the high court failed to declare it unconstitutional. Accordingly ,this means that only a new commencement date need to be established. Arguments for and against the Act have been raised without an critical analysis . .Ochoro(2002) recommends that empirical analysis should be taken to clear the differing views.This study was undertaken with a view of of determining whether the position held by banks of decrease in profitability is true or not. Performance of banks in year 2001 (the proposed commencement date had the Bill been adopted) was evaluated. The assumption here is that performance in that year will capture the picture that would be of interest to investors and banks and other interested persons. Deposit rate and lending rates were adjusted as per the Act. Secondary data obtained from published sources was used for the study. The results of the study indicate that control of interest rates would result to decrease in financial performance of commercial banks