The Effect of Financial Sector Reforms on Interest Rates Spread of Commercial Banks in Kenya

Abstract

Financial sector reforms involve the review or change of the financial sector. Commercial banks dominate the financial system in developing countries. Commercial banks play a vital role in the economic resource allocation of countries. They channel funds from depositors to investors continuously. A key indicator of financial performance and efficiency in the banking sector is the spread between the lending and deposit rates. One of the expected benefits of financial liberalization and deepening of the financial sector is the narrowing of the interest rate spreads. The main objective of this study was to determine the effect of financial sector reforms on interest rates spread of commercial banks in Kenya. This was achieved by checking whether the reforms affect the interest spreads positively or negatively. Secondary data was used for this research and descriptive study was adopted. From a population of 44 commercial banks in Kenya, the study obtained data from 10 banks for the period 2004 to 2013. Regression model and descriptive statistics was used in data analysis. The study focused on three reforms; development of Real Time Gross Settlement System (RTGS), mobile banking and agency banking. These were the independent variables. The dependent variable was the annualized interest rate spread. The regression findings show that 81.9% changes in interest rate spread among commercial bank in Kenya could be accounted by changes in value of real time gross settlement transactions, value of mobile banking transactions and value of agency banking transactions at 95% confidence interval. From the finding on the correlation coefficient, the study found that there was a strong positive relationship between the interest rate spread among commercial bank in Kenya and each of the independent variables. From the Analysis of Variance (ANOVA) statistics, the study found that each of the independent variable significantly influenced interest rate spread among commercial banks in Kenya. The study also revealed that the p-value for all the variable was less than 0.05, each of the independent variable was statistically influencing change in the interest rates spread.