The effect of interest rates on financial performance of Commercial banks in Kenya

Abstract

Interest rates in Kenya have been fluctuating over the last few years with the effect of fluctuations remaining unknown on financial performance of commercial banks. Interest rates and macroeconomic volatility generally were the motivation behind this study as there was little information about effect of the same on commercial banks’ financial performance in Kenya. In addition, commercial banks’ profitability for most of the Sub- Sahara African countries has been about 2 percent over the last 10 years and compares significantly with other developing economies, but higher than the developed world. A major research question was why commercial banks in Sub-Sahara Africa remained more profitable irrespective of the high interest rates and volatile macroeconomic environment. This study sought to determine the effect of interest rates on financial performance of commercial banks in Kenya. The study used descriptive research design using secondary data obtained from Central Bank of Kenya for the period of five years from 2009 to 2013. Data obtained was analyzed using SPSS version 21 and results obtained tested for significance using ANOVA. The study found that interest rates have significant positive effect on financial performance of commercial banks in Kenya at 95% confidence level. The relationship between interest rates and financial performance was also found to be linear with increase in interest rates leading to higher profitability. The study also concluded that bank size and interest rate volatility had effect on profitability of commercial banks. The study also found that the model containing interest rates and size of commercial bank can explain 64% of the changes in commercial banks profitability. The study recommended that policies to be put in place to shield bank lending rates and ensure monitoring the same. Further, so as to cushion consumers from exploitation by commercial banks, the Central Bank need exercise their monitoring roles strictly and discipline any commercial banks that may be increasing the interest rates arbitrary to boost their profitability. The study also recommends that in times of poor performance of commercial banks and the need to boost their profitability may be necessary for their role in economy, Central Bank of Kenya should come up with monetary policy that will lead to rise in interest rates and hence improving banks profitability.