The relationship between lending interest rate and profitability of commercial banks in Kenya

Abstract

Over the years commercial banks in Kenya have been performing tremendously. In Kenya, the bank lending interest rates are always charged on loans by the commercial banks to private individual and companies. The main objective for the study was to determine to what extent lending interest rates affect profitability of commercial banks. The study used descriptive research design using secondary data obtained from Central Bank of Kenya for the period of five years from 2010 to 2014 as well as published commercial banks annual reports 2014. Data obtained was analyzed using SPSS version 2.0 and results obtained tested for significance using ANOVA. The study found that lending interest rates have significant positive effect on financial performance of commercial banks in Kenya at 95% confidence level. The relationship between lending interest rates and profitability of commercial banks was also found to be linear with increase in lending interest rates leading to higher profitability. The study also concluded that bank size, capital adequacy, and operational costs all significantly had effect on profitability of commercial banks. The study recommended that policies to be put in place to shield bank lending rates and ensure monitoring the same.