Determinants of interest rates spread in the banking sector Kenya

Abstract

The main purpose of the study was to establish the determinants of banking sector interest rate spreads in Kenya. The study adopted the use of descriptive design. For the research purpose, secondary data was collected for a 33 year period 1981 to 2013 from the EAC statistic portal, IMF statistics portal and KNBS database. The secondary data on interest rate spreads and its determinants namely; Bank Development, Annual Real per capita GDP, Statutory reserve requirements, Inflation, Exchange Rate Volatility, Government Borrowing from the Banking Sector, Discount Rate and Treasury Bill Rate were regressed in a multiple regression model which established statistically significant relationships between treasury bill rates, reserves and discount rate. The study thus recommends for policy formulation to protect deposit protection so as to reduce the effect of bank reserve requirements as a cost to banks which is passed on to the consumers in form of interest rate spreads. The study further recommends advanced causality and impulse response studies on the interest rate spreads and its determinants.