The effect of interest rates spread and management efficiency on the growth of lending among commercial banks in Kenya

Abstract

Despite the liberalization of the financial sector, high interest rate spreads is still an issue of concern in a number of African countries, including Kenya. Commercial banks set interest rate levels for deposits and loans which has resulted to widened interest rates spread over the years. Interest rates charged to borrowers remain relatively high compared to interest rates earned by the savers. Excessive interest rates discourages potential borrowers which limits the level of growth on lending and increases the level of non-performing assets due to high level of default. Management of commercial banks have concentrated their efforts in managing the operational costs other than focusing on how to bring down the lending rates to merge with deposit rates. This study sought to establish the effects of interest rates spread and management efficiency on growth of lending among commercial banks in Kenya. The target population in this study is all 43 commercial banks in Kenya. Data is collected from central banks supervision report and published financial statements of various commercial banks. The data collected was analyzed using SPSS (Statistical Package for Social Scientists). Regression analysis was used to analyze the data and find out whether exists a relationship between interest rates spread and management efficiency on growth of lending among commercial banks in Kenya. The study established strong positive relationship between growth on lending among commercial banks with interest rates spread and management efficiency. The study found variables are significance to influencing growth on lending. The study found that interest rate spreads affects the growth of lending as increases the cost of borrowing and the level of non-performing assets of the bank. The study recommends that the government should regulate the interest rates by setting a bench mark rate to be charged by commercial banks.