Determinants of interest rate spreads in Kenya
Numerous variables exogenous to the operations of commercial banks have been touted in academic literature to be impmtant factors causing the typically high interest rate spreads in developing countries. Using data for Kenyan banking sector, this paper uses Generalized Method of Moments (GMM) teclmique to detetmine the macroeconomic and market detenninants of banking sector interest rate spreads in Kenya. The empirical results suggest that the impact of macroeconomic factors such as exchange rates are not significant. The effect of macro-policy captured by public debt and the treasury rate was found to be negative and not significant, which could arguably imply a weak response by banks to the policy signals. Bank development, inflation and total deposits, which is a proxy for market size and inflation rates are the significant variables. Bank development and inflation rates are negatively conelated with the interest rate spread while total deposits are positively conelated with interest rate spreads. On the other hand, exchange rates, public debt, T -bill rates and loan to deposit ratio, which is a proxy for bank intermediation, are insignificant.