EFFECT OF INTEREST RATES ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

Purpose: The purpose of this study was to analyse effect of interest rates on the financial performance of commercial banks in Kenya.Methodology:The study adopted anexplanatory research design. This study adopted a census research design; of all the 43 commercial banks in Kenya.The study also used secondary data.Multiple linear regression model was used to analyze the data using statistical package for the social sciences (SPSS) version 20.Results:The study established that lending rate ratio influence the financial performance of commercial banks in a positive way. Deposit interest ratio on the other hand negatively affects performance of commercial banks. Liquidity management and liquidity management influence performance positively and negatively respectively. The study concluded that there is a positive significant relationship between lending rate ratio and financial performance of commercial banks. The study also arrived at the conclusion that deposit interest ratio negatively affects bank performance. Moreover, the study concluded that liquidity management and asset quality affect performance positively and negatively respectively.Unique contribution to theory, practice and policy:Following study results, itwasrecommended that commercial banks in Kenya should keenly manage their lending interest rates given that lending interest ratio is directly related to performance. The study also recommends that commercial banks need to monitor the interest on deposits carefully. The deposit interest ratio is negatively affects performance. It represents the main expense by any commercial bank and therefore for a commercial bank to be profitable, they must maintain a reasonable spread. Commercial banks must strive to raise deposits at reasonable rates in order to on lend to the customers. Commercial banks that attract deposits cheaply are able to advance loans cheaply and therefore attract more borrowers.It is recommended that banks should embrace prudent credit risk management to maintain appropriate asset quality. Credit information sharing and cross referencing with credit bureaus will ensure high risk borrowers are closely monitored. Such measure will result in a reduction of nonperforming loans improve the asset quality