The Effect of Interest Rates on Lending in Mortgage Financial Institutions in Kenya

Abstract

There is a need for financial stability. Housing finance necessarily involves long term loans, and making long term loans in a sound way for both lending institution and borrower is far from easy when interest rates and inflation are high and volatile. Mortgage is a long-term commitment that ties a prospective homeowner down to mortgage repayment for at least 20 years or transfer of a legal or equitable interest in a specific immovable property for the payment of debt. Mortgage loans are secured by the real property and provide a schedule of payment of interest and repayment of the principal to a bank. The objective of the study was to determine the effect of interest rates on lending by mortgage financial institutions in Kenya. The study was driven by the need to understand how changes in interest rates are likely to affect the amount of mortgage lending advanced by mortgage financial institutions to their customers. The study adopted a time series secondary data and according to CBK, there are there are 43 licensed commercial banks and 1 mortgage finance company in Kenya as at 31st December 2012 the study used a sample population of 30 financial institutions comprising of 29 commercial banks and one housing finance. The study used secondary data sources to collect data from CBK, World Bank, Hass Consult and The Mortgage Company website. The data collected was analyzed using excel linear regression analysis conducted at 95% confidence level. Regression analysis results indicate an inverse relationship between the level of interest rates and the mortgage granted by mortgage financial institutions. This relationship is weak as exemplified by the low levels of coefficient of determination and correlation coefficients. Therefore this means that there are other factors that affect lending by mortgage financial institutions in Kenya other than mortgage interest rates. The study recommends that the government should focus its attention on the other most important variables which determine lending by mortgage financial institutions and influence these variables. Thus the government should leave the determination of interest rates to the market forces of supply and demand but strengthen the monetary policies to ensure that the rate of inflation which is a major component of interest rate is controlled and managed below the two digit figure to avoid inflationary pressure pushing interest rates upwards.