Interest rate changes and bank profitability

Abstract

This study looks at how interest rate changes affect Kenyan commercial banks' profitability, with a particular emphasis on loan performance and liquidity management. The study uses correlation analysis and panel regression models with panel data from 38 banks (2018–2023). The cost of keeping sizable reserves is highlighted by the findings, which show that excessive liquidity has a negative impact on profitability even while loan performance has no discernible effect. The study emphasizes how important it is for banks to use financial technology, diversify their sources of income, and improve liquidity management. Additionally, it suggests adaptable regulatory measures to strike a balance between economic stability and profitability. Banks, regulators, and legislators can all benefit from these ideas when it comes to reducing interest rate risks.