The relationship between interest rates and mortgage default rate among financial institutions in Kenya

Abstract

The objective of the study was to establish the relationship between interest rate and mortgage default rate among financial institutions in Kenya. The study used a descriptive correlation research design. The population of the study comprised all the forty-four commercial banks and one mortgage finance company registered with the central bank. The study used secondary data collected from the Central Bank of Kenya, Central Bureau of Statistics and Banks published financial statements starting 2009 – 2013. The data obtained was analyzed using multiple linear regression technique. The study established that there existed a positive relationship between the level of interest and default rate whereby an increase in interest rate increased non-performing loans. From the findings, averages for mortgage default rate for all the banks as obtained from the financial statements reflects an upward rise over the 5 year period. The study recommends that commercial banks in Kenya should assess their clients and charge interest rates accordingly, as ineffective interest rate policy can increase the level of interest rates and consequently default rate. Commercial banks should also apply rigorous policies on loan advances so as loans are awarded to those with ability to repay