The Effect of Operational Efficiency on Interest Rate Spread Among Commercial Banks in Kenya

Abstract

Interest rate spread remain a controversial area of study as some scholars link it to market forces and others to individual banks inefficiency, and even others link it to external macroeconomic forces. Banks that perform well manage to keep interest rate spreads wide. Most of the studies conclude that the spread is as a result of inefficiency in the banking sector. The general objective of this study was to investigate the effect of operational efficiency on interest rate spread among commercial banks in Kenya. The population of interest in this study comprised of the 43 commercial banks operating in Kenya as at December 2014. This study collected secondary data which was obtained from the financial results filled at Central Bank of Kenya, Central Bureau of Statistics and Annual Banking Survey reports. The study used both descriptive and inferential statistics in analyzing the data. Data collected was cleaned, sorted and collated. Descriptive statistics such as mean score, frequencies and percentages for each variable was calculated and tabulated using frequency distribution tables and graphs. The study concluded that operational efficiency positively and significantly influenced the interest rate spread among commercial banks in Kenya. The study recommended that the central banks should apply stringent regulations on interest rates charged by banks so as to regulate their interest rate spread. The study suggests that further studies should be conducted in similar study for longer period of 10 years. A similar study should also be carried out too on the effect of operational efficiency on interest rate spread incorporating other variables such as the prevailing macroeconomic in a country as opposed to the current study which took only six variables into account. A study can also be done in more than one country to make better the findings and provide more room for generalization. This is because the findings of this study are focused on the Kenyan banks alone.