The effect of interest rate volatility on mortgage default rate in Kenya

Abstract

The mortgage market in Kenya has increased from 7,600 in 2006 to 20,000 homes in 2012 but hikes in interest rates has slowed down mortgage uptake. The prevailing high interest rates as a result of a stringent monetary policy being pursued by CBK as an effort to fight high inflation has dampened the mortgage market further. The objective of the study was to establish the effect of interest rate volatility on mortgage default rate in Kenya. The study used a descriptive correlation research design. The population of the study comprised all the forty-four commercial banks and one mortgage finance company registered with the central bank. The study used secondary data collected from the Central Bank of Kenya, Central Bureau of Statistics and Banks published financial statements starting 2008 – 2012. The data obtained was analyzed using multiple linear regression technique. The study established that there existed a positive relationship between the level of interest and default rate whereby an increase in interest rate increased non-performing loans. From the findings, averages for mortgage default rate for all the banks as obtained from the financial statements reflects an upward rise over the 5 year period. The study recommends that commercial banks in Kenya should assess their clients and charge interest rates accordingly, as ineffective interest rate policy can increase the level of interest rates and consequently default rate. Commercial banks should also apply rigorous policies on loan advances so as loans are awarded to those with ability to repay and mitigate moral hazards such as insider lending and information asymmetry