The Effect of Lending Interest Rates on Financial Performance of Commercial Banks in Kenya

Abstract

Interest rates offered by commercial banks globally and locally attract customers to purchase products and services of financial institutions. The magnitude of interest rate spread, however, varies across the world. It is inversely related to the degree of efficiency of the financial sector, which is an offshoot of a competitive environment. The objective of this study was to determine the effect of lending interest rates on financial performance of Commercial Banks in Kenya. The study utilized descriptive research design. The study used a census where all the 43 Commercial Banks operating in Kenya and registered by Central Bank of Kenya were selected. The study entailed the use of secondary data. The data collected was analyzed using the multiple regression analysis models. The study established that lending rates has a positive influence on the financial performance of financial institution because it is the main determinant of interest income. The study further concludes that management plays a key role in the financial performance of commercial banks because it is the one charged with the responsibility of organizing other sources of production. An efficient management will ensure that the operating expenses of the Bank are kept at their optimal minimum hence promote the financial performance recorded. The study recommends that commercial banks evaluate their lending rates properly to ensure that they have adequate loan disbursement but also high returns that would improve the financial performance. The study also recommends that financial institutions increase their management efficiency because unless this is done, the high interest income earned from loans could easily be wiped out by high operating costs. In order to adhere to recommended non performing loans ratios and earn optimal interest income, this study recommends that commercial banks accurately evaluate loan applicants to ensure that bad debts are eliminated.