To Determine Interest and Loan Default Rates Among Commercial Banks in Kenya

Abstract

Banks operate in an environment of considerable risk and uncertainty. This study investigates the relationship between interest rates and non-performing loans for commercial banks in Kenya. The period of analysis was five years from 2008 to 2012. The findings indicate an increasing trend of average market interest rates ranging from 12.02 in the year 2008 to 19.20 in the year 2012. This indicates improved performance in the macro economic variables over the years under the study. The level of non-performing loans on average declined in all commercial banks for the period under study. The decline was however, more pronounced in privately owned banks than in the state owned. The literature review focused on term structure theory as the guiding frame and other researchers who explored the concepts of interest rates in banks, loan default in commercial banks, and the relationship between interest rates and loan default rates. The methodology is cross sectional descriptive design carried across all the 47 registered banks in Kenya, library research and content analysis were used to collect and collate the data. The findings also reveal that there is a positive relationship between interest rates and nonperforming loans, therefore it is evident that there are other factors an indication that when interest rates increase, commercial banks should put in place mechanisms to deal with nonperforming loans to minimize their adverse effects on bank performance. There are discussions and conclusions have been included in chapter five, which also gives the recommendations for further studies. There are appendices to guide the user of this document.