Relationship Between Interest Rates And Financial Performance Of Firms Listed At The Nairobi Securities Exchange

Abstract

The main purpose of the study was to assess the nature of the relationship between interest rates and financial performance of firms listed at the Nairobi Securities Exchange. The study is significant to the government in setting interest rates appropriate to influence the level of borrowing and lending to encourage economic development. The study will guide firms in making informed decision on borrowing and lending to influence the financial performance of their firms positively, while investors can use the results obtained from the research to make decisions on which sectors of the economy to invest in at different levels of interest rates. The study covered five years from 2008 to 2012 inclusive and the research was based on secondary data obtained from published financial statements of the firms and publications by the Central Bank of Kenya. The causal research design was employed to assess the nature of the relationship between interest rates and financial performance of firms listed at the Nairobi Securities Exchange. Regression analysis was used to assess the nature of the relationship. Results obtained from the study indicated a not significant positive relationship between interest rates and financial performance. On disaggregation and grouping of the firms to their respective industries, it was found that linear regression model can selectively be used to forecast financial performance of firms’ at given levels of interest rates for firms where statistically significant relationship was found. However, for firms which on further analysis it was found that the effect of interest rates on financial performance was not significant, other factors which influence financial performance need to be considered and enhanced in order to significantly improve the financial performance of those firms.