The Effect of Interest Rate Spread on the Level of Non Performing Loans of Commercial Banks in Kenya

Abstract

The purpose of this study was to investigate the effects of interest rate spread on the level of nonperforming loans by commercial banks in Kenya. The research design used was explanatory because the study intended to establish if there was a causal relationship between interest rate spread and level of nonperforming loans. The population of the study was all the 43 commercial banks. The study used secondary data sources to gather information relevant in reaching at the research objective. The secondary data were collected from the CBK supervision reports on the macro-economic indicators and Kenya National Bureau of Statistics (KNBS) reports. Data was sorted and input into the statistical package for social sciences (SPSS) for production of tables, and descriptive statistics.

The ANOVA results show that the independent variables were good predictors of level of nonperforming loans. The results indicated that Log interest rate spread and Log debt collection cost were statistically significant in explaining level of nonperforming loans. Results indicate that a unit change in Log interest rate spread variable will lead to a positive change in level of nonperforming loans while a unit change in Log debt collection cost will cause a negative and significant change in level of nonperforming loans and a unit change in log credit appraisal cost will cause a negative and insignificant change in log level of non performing change.

It is recommended that banks should be encouraged to conduct regular training programmes for credit staff. It is recommended that Central Bank which is the Regulatory Authority of commercial banks in Kenya should apply stringent regulations on interest rates charged by commercial banks. Banks should also apply efficient and effective credit risk management. It is recommended that commercial banks should use the services provided by Credit Reference Bureaus for the purpose of determining the credit worthiness of borrowers as a means of minimizing bad loans.