Determinants of interest rate spreads among licensed commercial banks in Kenya

Koech, Emmanuel
Journal Title
Journal ISSN
Volume Title
Strathmore University
High interest rate spreads remain a barrier to financial intermediation because it disheartens probable investors with little profits on deposits and raises funding expenses for debtors consequently decreasing savings and development chances. Thus, it is imperative to ascertain factors that affect interest rate spreads that in essence to solve the barriers to financial intermediation. The broad research objective was to establish factors that influence interest rate spreads. Specific objectives included to determine effect of interest capping legislation, asset quality, management quality, bank size, and leverage on interest tariff spreads of commercial banks in Kenya. An exploratory, ex post facto and causal research design was adopted because it established the cause and effect relationship. The target population was the 42 licensed commercial banks in Kenya as at 30th June 2016. However, eight banks were expunged from the analysis because they became licensed before the study period, ceased operations in the study period, or were sharia compliant banks that did not charge interest. The study period comprised five quarters before interest capping law was enacted and five quarters after. The study utilized secondary panel data. The researcher employed multiple linear regression to analyze data collected during the study, Statistical Package for Social Sciences (SPSS) was used in analyzing data. Research variables were analyzed using fixed effects panel regression model. The univariate general linear model was utilized with the banks being the limiting factor. The study concluded that the factors chosen in the study have substantial effect in unison on interest tariff spread. However, only the interest rate capping legislation had a noteworthy effect on interest rate spread in isolation. This implies that since the enactment of bill capping interest rates, the interest rate spreads have been declining. Thus, the law had a significant influence on interest rate spreads since its enactment. Research findings were proposed to government agencies to evaluate influence of interest tariff capping law on interest rate spreads since its enactment and to also consider the effect on it by the various factors when formulating policies and legislative frameworks. Commercial banks’ management, consultants, and scholars can also utilize research findings to document influence of the various factors on interest tariff spreads.
A thesis submitted in partial fulfillment of the requirement for the Degree of Master of Commerce at Strathmore University
Asset quality management, Interest rate capping, Interest rates