The Effect of Lending Interest Rates on Financial Performance of Commercial Banks in Kenya

Abstract

The research sought to determine the effect of lending interest rates on the financial performance of the commercial banks in Kenya. The study involved a census survey of all the 43 commercial banks registered and in operation as at 31st December 2012 licensed to carry out the banking business in Kenya under the banking Act of Kenya CAP 486. The collected data was edited and cleaned for completeness in preparation for coding. Once the data was coded, it was entered into the Statistical Package for Social Sciences (SPSS) version 17 for analysis. ROE was regressed against the Lending interest rate, Operating cost efficiency and Management Efficiency. The study found out that a weak but positive relationship (R= 0.378) exists between lending interest rates and financial performance of commercial banks. The study also revealed that 14.3% of financial performance in commercial banks can be explained by lending interest rates. Analysis of variance also proved that the relationship was statistically significant. The findings were also verified through analysis of variance (ANOVA) statistics which gave a p-value of 0.132 which was far much above the recommended p-value of 0.05. The research recommends that commercial banks should judiciously manage their interest rate to improve their financial performance since it has a positive effect on the bank’s financial performance and also recommends for income source diversification by banks since lending interest rate only account for 14.3% which leaves a clean 85.7% revenue to be sourced through other means.