Effect of the Kenya banks reference rate on the performance of commercial banks in Kenya

Abstract

Prior to the introduction of the KBRR, banks in Kenya were using their individual base rates to price their loans. The framework they applied in the determination of the base rates was not tran sparent. Similarly, some level of asymmetry (irregularity) was observed in the response by banks to reductions or increases in the CBR. Banks tended to raise their lending rates proportionately and contemporaneously with increases in the CBR but tended to respond sluggishly to decreases in the CBR. Consequently, monetary policy signals were transmitted to the banks interest rates in an asymmetric manner. As a result of these issues, The Kenya Banks’ Reference Rate (KBRR) was introduced in July 2014 followin g discussions between commercial and microfinance banks, mortgage finance institutions, Kenya Bankers Association (KBA), Central Bank of Kenya (CBK), and The National Treasury. It is part of their recommendations to explore ways of enhancing the supply of private sector credit and mortgage finance in Kenya. The primary purpose of the KBRR is to ensure that banks are transparent with respect to the cost and pricing of their products. The study sought to determine the effect of KBRR on the financial commercia l banks performance in Kenya A descriptive study design was used with 43 commercial banks as the target population. Secondary data was obtained from CBK supervisory reports and the banks published financial statements. The data covered a period of 3 years from 2013 to 2015. Descriptive approach was used to determine the weights of the variables. Interpretation of data was done using SPSS and MS Excel. Inferential statistics involving use of ANOVA and regression analysis was done. Results from this study we re presented using charts and tables. From the findings the study concluded that there is very little effect of KBRR on performance of commercial banks in Kenya . From the regression analysis, KBRR has insignificant effect on the banks profit s hence the study concluded by stating that banks will always charge a higher premium ''K'' no matter what the base rate (KBBR) is in order to realize the targeted profits. The study further concluded that commercial banks in Kenya are profitable with over 90% of commercial banks having positive financial returns. The researcher recommends that further studies be done on a similar study for a longer time period.