Relationship Between Lending Interest Rates and the Financial Performance of Commercial Banks in Kenya

Abstract

This study sought to establish the relationship between lending interest rates and financial performance of the commercial banks in Kenya. It adopted a descriptive research design on a sample of listed commercial banks in Kenya. The study used secondary data, collected from Bank Supervision Report. The study used quantitative techniques in data analysis in order to establish relationship between the lending interest rates and performance of commercial banks. The data is presented using tables. The study findings revealed that lending interest rates spread affect the performance of commercial banks in Kenya as it increases the cost of loans charged on the borrowers. Regulations on lending interest rates have far reaching effects on performance of commercial banks for such regulations determine the lending interest rates in banks and also help mitigate moral hazards incidental to performance of commercial banks. Credit risk management technique remotely affects the value of a bank’s lending interest rates as lending interest rates are benchmarked against the associated non-performing loans and non-performing loans is attributable to high cost of loans. The study recommends that commercial banks in Kenya should assess their clients and charge lending interest rates accordingly. Ineffective lending interest rate policy increases the level of lending interest rates and consequently performance. The study also recommends that commercial banks should apply stringent regulations on lending interest rates charged to regulate their lending interest rates and enhance periodic/regular credit risk monitoring of their loan portfolios to reduce the level of Loans performance.