Relationship between interest rates and profitability of motor vehicle financing in Kenya

Abstract

A stable banking sector helps promote and strengthen economic growth by mobilizing resources for investment. It also provides a framework for undertaking financing of investment projects. The banking sector is very important in any economy, considering its basic function of which is to relocate funds from agents with surplus to those with deficit .The purpose of this study was to establish the relationship between interest rates on profitability of motor vehicle financing in Kenya. The total population consisted of all 43 commercial banks. Since the population of the study was small there was no need for sampling, therefore the whole population was used for study. The study used secondary data, which was readily available from both the Central Bank of Kenya. The study adopted a descriptive survey of the commercial banks in Kenya. Interest rates have always been thought to have significant relationship to profitability of motor vehicle financing by commercial banks. Secondary data was collected from financial reports of commercial banks in Kenya from 2008 to 2013.Regression analysis was conducted in order to establish the relationship of interest rate on motor vehicle financing by performance of commercial banks in Kenya. These variables included the interest rate (IR), the exchange rate (XR), liquidity (LQ) and money supply (MS), which are usually provided by the Central Bank. The dependent variable of the study was the profitability of motor vehicle financing measured by ROE of the commercial banks in Kenya as a percentage. The findings from the study confirmed that interest rates and liquidity had varying degrees of relationship with the profitability of motor vehicle financing of the commercial banks. The study also revealed that interest rates, exchange rate, money supply and liquidity positively influenced the profitability of commercial banks that engage in motor vehicle finance. This study also established that interest rates, exchange rate, and liquidity are positively correlated with the profitability of motor vehicle financing by commercial banks. This study therefore recommended that the Country should handle its macroeconomic policies appropriately as the changes in the macroeconomics like interest rates, bring about devaluation of the currency and impact the profitability and performance of the commercial banks.