The effect of credit risk on interest rate spread among commercial banks in Kenya

Abstract

Commercial banks in Kenya have continuously maintained wide interest rate spreads despite efforts by both the government and the regulator to ensure the interest rate spreads narrow down. This has led to a lot of debates both in public and private panels which makes it clear that it is important for the involved parties to understand the factors that determine interest rate spread among commercial banks in Kenya in order to effect valuable changes. This study investigated the effect of credit risk on interest rate spreads in Kenya for the period 2009 to 2013, while including other factors such as Liquidity risk, Bank size and Operating costs that have been established previously to affect interest rate spreads among commercial banks in Kenya. This was accomplished using panel data analysis that was adopted and used on Kenyan data obtained from Central Bank Supervision Reports and Financial Statements for respective banks. Stata statistical package was used in estimating the regression model and descriptive analysis was also carried out on the credit risk and interest rate spreads variables. Regression analysis between interest rate spread as our dependent variable and credit risk, liquidity risk, bank size and operating costs as the independent variables was conducted and the effects of each independent variable on the dependent variable observed at 0.05 level of significance. The study findings revealed that bank size and operating costs were the most significant variables while credit risk and liquidity were insignificant at 5 percent levels. On the basis of these findings, it is recommended that competition among commercial banks in Kenya needs to be enhanced so as to be able to push banks to pay more attention to credit risk management and use it as a competitive advantage through the implementation of lean interest rate spreads