An evaluation of the effect of interest rates on credit

Abstract

Equity Bank has the largest customer base of Kenyans with bank accounts. About 57 percent of all bank accounts are held in Equity Bank. This makes Equity Bank a major determinant on how banks’ make their proposals on which interest rates to charge customers. The broad objective of the study is to evaluate the effect of interest rates on credit; whether when interest rates increase or decrease on the types of commercial banks’ loans for different products; determine the number of people taking the loans, and the size of the loans taken. Using primary data obtained from Equity Bank for the purposes of making inferences, the study involved 1,000 customers from various branches countrywide. The sample was randomly selected from the total customers of Equity bank of 2011. The results indicate that region and the repayment period are significant in explaining the amount of credit to the individual customers. After correcting for heteroskedasticity, the interest rate charged on loans is insignificant in explaining borrowing by Equity Bank’s customers