The Effect Of Interest Rate Spread On Financial Performance Of Commercial Banks In Kenya

Abstract

The last decade has been a period of dramatic changes for the banking sector in Kenya. Interest charged to borrowers rose to thirty percent and above in 2012 while interest earned by the savers remains relatively low. This resulted debate by members of parliament to control banks interest rate due to their skewed way of increasing interest rate, argument was bank only increase interest rate charged to customers only, on the other side banks argues if interest rate is controlled many banks will collapse. Banks as other business sought to maximize profit one way of achieving this is enlarging spread. The study sought to determine the effect of interest spread on Kenya commercial banks financial performance. The target population in this study is all 43 commercial banks in Kenya. Data is collected from central banks supervision report.The data collected was analysed using SPSS (Statistical Package for Social Scientists). Regression analysis was used to analyze the data and find out whether exists a relationship between interest rate spread and the performance of commercial banks in Kenya. The study found that there is strong positive relationship between financial performance of commercial banks with interest rate spread. Study found variables are significance to influencing financial performance of Kenya banks. The study found that interest rate spread affect performance assets in banks as it increases the cost of loans charged on the borrowers, regulation on interest rates have far reaching effects on assets non-performance. The study recommends there is need for government to regulate interest rates as this would help to safeguard borrowers from exploitation by commercial banks.