FACTORS INFLUENCING INTEREST RATE SPREAD AMONG COMMERCIAL BANKS IN KENYA

EMILY GATUNE

Abstract


Banking systems have been shown to exhibit significantly and persistently large interest rate spreads on average than those in other developing and developed countries. High Interest rate Spreads are an impediment to financial intermediation, as they discourage potential savers with low returns on deposits and increase financing costs for borrowers, thus reducing investment and growth opportunities. This is of particular concern for developing and transition countries where financial systems are largely bank-based, as is the case in Kenya and tend to exhibit high and persistent spreads. The study aimed at establishing the factors influencing interest rate spread among commercial banks in Kenya. The research adopted a descriptive survey research design. The design was chosen since it was more precise and accurate since it involves description of events in a carefully planned way. The target population of this study was the management staff working at commercial banks headquarters in Nairobi. So the researcher intended to examine a sample of staff drawn from the population of 597 financial management staff working in commercial banks of the top, middle and low level management ranks at the headquarters in Nairobi.  Stratified proportionate random sampling technique was used to select the sample of 234 respondents. The study used both primary and secondary panel data. Primary data was obtained through self-administered questionnaires with closed and open-ended questions. The questionnaires were distributed using the drop and pick later method. Descriptive statistics such as means, standard deviation and frequency distribution were used to analyze the data. The researcher used simple linear regression model to analyze the relationship between the independent and dependent variables. The findings were presented using tables and figures to summarize responses for further analysis and facilitate comparison. The findings were presented using tables and figures to summarize responses for further analysis and facilitate comparison. The study concluded that that market structure influence to a very greater extent interest rate spread among commercial banks in Kenya. Aspects such as market shares of loans and advances, regulated savings deposit rate, reserve requirements/provision for loan losses contributes to this factor. The study recommends that commercial banks move from their traditional mechanisms used to control credit risk, to loan portfolio restructuring and a further research should be done on the influence of the different types of interest rates on interest rate spread in Kenya.

Key Words: Interest Rates, Commercial Banks


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References


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