Effects of Lending Rates on Share Prices of Commercial Banks Quoted in the Nairobi Securities Exchange

Abstract

Over the last few years, the Banking sector in Kenya has continued to growth in assets, deposits, profitability and products offering. This growth has seen the bank entry into the privatisations making the Bank executives and industry analysts argue that interest-rate exposure is important to depository institutions. Interest rate are important as without them, people would not be willing to lend or even save their cash. Commercial banks base their lending rate on the Central Bank’s rate, which they have no control of but is rather controlled by the money markets. Therefore, banks have little or no control of their lending rate and the changes arising thereof affects the banks directly. The share price on the other hand is a measure of the bank’s demand in the securities exchange due to its attractiveness in the market. This study set out to look at the effects of lending rates on the share prices of commercial banks listed in the NSE. The study employed a census survey design in carrying out its endeavour on all the NSE listed commercial banks in Kenya. It relied on secondary data from the study period 2008-2013 which was analysed through SPSS software. The study found that the lending interest rate has been widely varying for last 5 years, changes that have been mimicked by the commercial banks’ share prices. This observation was further enhanced by the proof of existence of a strong relationship between the lending interest rate and the commercial banks’ share prices. The study also found that the lending interest rate inversely affects commercial banks’ share prices where an increase in lending rates causes a decline in the share prices. The study recommends that the lending rate variations to be considered in solving the stock crisis arising in the NSE emanating from the commercial banks involvement in the bourse. It recommends further studies to be carried out on the qualitative relationship between the lending rate and the share prices to enhance the findings of this study on the inverse relationship observed in this study.This will ensure immense understanding of the relationship that would allow its use in policy making