The effect of loan size on interest rate spread in commercial banks in Kenya

Abstract

The objective of this study was to examine the effect of loan size on the interest rate spread in commercial banks. This study was largely a quantitative research. Given that the purpose of this study was to examine the effect of loan size on the interest rate spread, the appropriate design was causal predictive research design. The study population was drawn from commercial banks currently licensed and trading in Kenya. Since the number of banks is not so large, all the 43 commercial banks were targeted in the study. Secondary data was used in this study. This was collected from annual reports of the 43 commercial banks for the 10 year period between 2004 and 2013. The collected data was organised into SPSS and analysed using descriptive analysis, correlation analysis, and regression analysis. The study found that the model accounted for 87.1% of the variance in interest rate spread of the commercial banks R2= .871). The F-statistic of 1.683 was not significant at 5% level of significance, p = .425. This shows that the model was not fit to explain the effect of loan size on the interest rate spread. The results show that loan size, credit risk, operating costs and liquidity have a weak negative effect on the interest rate spread of the banks while bad loans/total loans, collateral/total loans, bank size and performance had weak positive effect on the interest rate spreads of the commercial banks. All the effects were insignificant at 5% significance level. The study therefore concludes that loan size does not influence the interest rate spread of the commercial banks. The study recommends that other factors that influence the interest rates of commercial banks be used in order to ensure that commercial banks set optimal interest rate spreads and thus improve their performance.