The Effect of Lending Interest Rates on the Performance of the Nairobi Securities Exchange

Abstract

The stock market fulfills a central function in the economy, bringing together savers and investors (providers of capital) on the one hand with companies and the state (borrowers) on the other. Without this mediator, the capital providers and borrowers would have to negotiate directly, which would generate heavy search and information costs. Whereas companies and the state often require large sums of long-term capital, most of the savers and investors want to provide small amounts for relatively shorter time periods. The stock market makes possible an optimal and efficient reconcilement of interests between these groups. Savers and investors can buy and sell securities on the exchange at any time, without directly affecting the companies. The relationship between interest rates and the performance of the stock exchange has been the subject of research by scores of researchers especially in the developed economies whereby the findings have been contradicting. The objective of this study was to establish the relationship between lending interest rates and the performance of stocks at the Nairobi securities exchange. Secondary data was obtained from NSE and Central Bank of Kenya and analyzed using regression on descriptive data with aid of SPSS. The data obtained from the Nairobi securities exchange and the central bank of Kenya for the period January 2011 to December 2013. The study found that lending interest rates are negatively related to NSE performance. However, at 95% confidence level, the effect of lending interest rates on NSE performance was not significant (p value of 0.56458). Further, the study found that exchange rates are negatively related to NSE performance even though the relationship was weak. Inflation was found to have strong, negative and significant effect on NSE performance. The negative effect of inflation on NSE performance is stronger than that of lending interest rates and exchange rates. The study recommended that the regulators to formulate and implement policies to ensure that inflation rates, lending interest rates and exchange rates remain low as possible so as to boost performance of NSE.