The Relationship Between Lending Interest Rates And Financial Performance Of Commercial Banks In Kenya

Abstract

Due to competition in the banking industry in the global market, financial institutions are necessitated to offer attractive lending rates to their customers in order to survive (Salloum and Hayek, 2012). Interest rates offered by commercial banks globally and locally attract customers to purchase products and services of financial institutions. Commercial banks play a vital role in the economic resource allocation of countries. This Study set out with an objective of establishing the relationship between lending interest rates and financial performance of commercial banks in Kenya. To achieve the objective of the study, the researcher used regression analysis to establish the relationship between lending interest rate and ROA. The study adopted a quantitative research design. Quantitative research method refers to the systematic scientific investigation of data and their relationships. This involves developing and using mathematical models, theories, and hypothesis to analyze the relationship between variables. The quantitative research design was adopted to facilitate investigation of the relationship between returns on assets (dependent variable) and lending interest rate (independent variable). The findings and analysis reveal that lending interest rates have an insignificant effect on financial performance of commercial banks in Kenya. The results obtained from the model shows that there is a positive relationship between lending interest rates and financial performance of commercial banks in Kenya which is insignificant. However, since the relationship is insignificant we conclude that lending interest rates by Commercial Banks does not necessarily improve the financial performance.