FACTORS INFLUENCING INTEREST RATE SPREAD AMONG COMMERCIAL BANKS IN KENYA
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
Full Text:
PDFReferences
Acemoglu, D., & Johnson, S. (2005). Unbundling Institutions. Journal of Political Economy, 113, 949-995.
Altman, E. I., & Saunders, A. M. (1998). Credit Risk Measurement: Development over the Last 20 Years. Journal of Banking and Finance, 21, 1721-1742.
Angbanzo, L. (1997). Commercial Bank Net Interest Margins, Default risk, Interest rate risk, and Off-Balance sheet Banking. Journal of Banking and Finance, 21, 55-87.
Arano, K., & Emily, B. (2008). Determinants of Loan Interest Rates: Evidence from the Survey of Small Business Finances (SSBF). Retrieved; 23/10/2008, from http://papers.ssrn.com/sol3/Jeljour_results.cfm?Network=no&SortOrder=ab_approval_date&form_name=journalBrowse&journal_id=302&nxtres=1921
Bandyopadhyay, A. (2007). Credit risk modeling for managing Bank's Agricultural Loan portfolio: MPRA No.5358. Retrieved; 4/12/2009, from http://ideas.repec.org/p/pra/mprapa/5358.html
Barajas, A., Roberto, S., & Natalia, S. (1998). Interest spreads in Banking: Financial taxes, Market power, and Loan quality in Columbia 1974-1996.
Barajas, A., Steiner, R., & Salazar, N. (1996). Interest spread in banking: Costs, financial taxation, market power and loan quality in the Colombian case, 1974–1988. Washington, D.C: IMF Working Paper No. 110.
Bazibu, M. (2005). Information Asymmetry and borrowers’ performance on loans in commercial banks. Makerere University, Kampala.
Beaver, W. H. (1966). Financial Ratios as Predictors of Failure. Journal of Accounting Research, 4, 71-111.
Beck, T., & Hesse, H. (2006). Bank Efficiency, Ownership and Market Structure; why interest Spreads are high in Uganda Washington D.C: The World Bank.
Berger, A., & Udell, G. (1995). Relationship lending and lines of credit in small firm finance. Journal of Business, 68(3), 351- 381.
Besanko, D., & Thakor, V. (1987). Collateral and rationing. Sorting equilibria in monopolistic and competitive credit markets. International economic review, 28, 671-689
Calcagnini, G., Farabullini, F., & Giombini, G. (2009). Loans, Interest Rates and Guarantees: Is There a Link? Working Paper, 0904. Retrieved from http://ideas.repec.org/p/urb/wpaper/09_04.html
Carbo, V. S., & Rodriguez, F. (2007). The determinants of bank margins in European banking. Journal of Banking and Finance, 31, 2043-2063.
Central Bank of Solomon Islands. (2007). Understanding the interest rate spreads in the Solomon Islands. Focus Report, March 2007. Retrieved; 24/06/2008, from http://www.cbsi.com.sb/fileadmin/publications/qr/2007/QR-JUN07.pdf
Chan, Y., & Kanatas, G. (1985). Asymmetric valuation and the role of collateral in loan agreements. Journal of money, credit and banking, 17, 84-95
Chan, Y., & Thakor, V. (1987). Collateral and competitive equilibria with moral hazard and private information. Journal of finance, 42, 345-363. .
Dabla-Norris, E., & Floerkemeier, H. (2007). Bank efficiency and market structure: what determines Interest rate Spreads in Armenia. IMF working paper, Wp/07/134(2134).
Degryse, H., & Cayseele, P. (2000). Relationship lending within a bank-based system: Evidence from European small business data. Journal of Financial Intermediation, 9, 90-109.
Demirguc -Kunt, A., & Huizinga, H. (1999). Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence. World Bank Economic Review, 13, 379-408.
Demirgüç-Kunt, A., Laeven, L., & Levine, R. (2004). Regulations, Market Structure, Institutions and the Cost of Financial Intermediation. Journal of Money, Credit and Banking, 36(3), 593-622.
Detragiache, E., & Demirgüç-Kunt, A. (1998). Financial Liberalization and Financial Fragility. IMF Working Papers Wp/98/83.
Emmanuelle, N.Y.S. (2003). A European study of bank interest margins: Is net fees revenue a determinant. Doctoral Thesis. United Kingdom, U.K: University of Birmingham
Engle, R. T., & Granger, C. W. J. (1987). Cointegration and Error Correction: Representation, Estimation and Testing. Econometrica, 55, 251-276.
Fama, E. (1985). What’s different about banks? Journal of Monetary Economics, 15, 29-40.
Fungáčová, Z., & Poghosyan, T. (2008). Determinants of Bank margins in Russia: Does Bank ownership matter? Journal of Economic Literature, 21, 34.
Gelos, G. (2006). Banking spreads in Latin America. IMF Working Paper, WP/06/44.
Gheva, D., Samet, Z., & Ruthenberg, D. (1992). The determinants of interest rate spread: The Israel experience. Bank of Israel Banking Review, No. 3, 61–74.
Gibson, H. D., & Tsakalotos, E. (1994). The Scope and Limits of Financial Liberalization in Developing Countries: A Critical Survey. Journal of Development Studies, 30(3), 578-628.
Guiso, L., Paola, S., & Zingales, L. (2006). The Cost of Banking Regulation. NBER Working Paper 12501.
Hanson, J.A., & Rocha, R.R. (1986). High interest rates, spreads, and the costs of intermediation. Industrial and Finance Series, Vol. 18.
Harhoff, D., & Korting, T. (1998). Lending relationships in Germany: Empirical results from survey data. Journal of Banking and Finance, 22 1317-1354.
Hendry, D. F. (1985). Monetary economic myth and econometric reality. Oxford Review of Economic Policy, 72-84.
Hillegeist, S., Keeting, E. K., Cram, D. P., & Lundstedt, K. G. (2002). Assessing the Probability of Bankruptcy: Northwestern University.
Ho, T. S. Y., & Sauders, A. (1981). The determinants of bank interest margins: Theory and Empirical evidence. Journal of Financial and Quantitative Analysis, 16, 581-600.
Jayaraman, T.K., & Sharma, R. (2003). Why is interest rate spread high in Fiji? Results from a preliminary study. Fijian Studies, 1(1).
Jayati, G. (2005). The Economic and Social Effects of Financial Liberalization: A Primer for Developing Countries. DESA Working Paper, No. 4 ST/ESA/2005/DWP/4.
Johansen, S. (1988). Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control, 12, 231-254.
Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 169-210.
Kasekende, L. (March 4-5, 2008.). Developing a Sound Banking System. Paper presented at the IMF Institute and the Joint Africa institute high-level Seminar, Tunis,Tunisia.
Manove, M., & Padilla, A. J. (1999). Banking (Conservatively) with Optimists. RAND Journal of Economics, 30, 324-350.
Manove, M., & Padilla, A. J. (2001). Collateral versus Project Screening: A Model of Lazy Banks. RAND Journal of Economics, 32(4), 726-744.
Maudos, J., & Guevara, J. (2004). Factors explaining the interest margin in the banking sectors of the European Union. Journal of Banking and finance, 28(9), 2259-2281.
Maudos, J., & Solis, L. (2009). The determinants of net interest income in Mexican banking system: An integrated model. Journal of Banking and Finance, 33(10 ), 1920-1931.
Mugenda, O.M., & Mugenda, A.G. (2003). Research methods, qualitative and quantitative approaches. Nairobi: Acts Press African Center for Technology studies (ACTS).
Mugume, J., & Ojwiya, C. (2009). Interest rate spreads in Uganda: Bank specific characteristic or Policy change. Bank of Uganda working paper series, 3(2), 24-48.
Nannyonjo, J. (2002). Financial reforms in Uganda (1990-2000): Interest rate spreads, Market structure, Bank performance and Monetary policy. PhD, the University of Gothenburg., Gothenburg.
Ngugi, R.W. (2001). An Empirical Analysis of Interest Rate Spread in Kenya. African Economic Research Consortium, Research Paper 106
Noyer, C. (2007). Challenges of financial liberalization for emerging markets. In RBI staff (ed) (Speech by Mr. Christian Noyer, Governor of Banque de France ed.). Mumbai: Reserve Bank of India, Central Office.
Ohlson, J. (1980). Financial Ratios and the Probabilistic Prediction of Bankruptcy. Journal of Accounting Research, 19, 109-301.
Panzar, J., & Rosse, N. (1987). Testing for Monopoly Equilibrium Journal of Industrial Economics, 35(4), 443-456.
Paroush, J. (1994). “The effect of uncertainty, market structure and collateral policy on the interest rate spread”. Bank of Israel Banking Review, 4: 79–94.
Pereira, S., & Sundararajan, V. (1990). Issues in interest rate management and liberalization. IMFstaff papers, 37(4), 735-752.
Petersen, M., & Rajan, R. (1994). The benefits of firm-creditor relationships: Evidence from small business data. Journal of Finance 49 3-37.
Phillips, P. (1986). Understanding Spurious Regressions in Econometrics. Journal of Econometrics, 33, 30.
Quercia, R., & Stegman, M. (1992). Residential mortgage default: A review of the literature. Journal of Housing Research, 3(1), 341-379.
Rajan, R., & Winton, A. (1995). Covenants and collateral as incentives to monitor. Journal of finance, 50(4), 1113-1146
Rajan, R., & Zingales, L. (1998). Financial Dependence and Growth. American Economic Review, 88, 559-586.
Ramakrishnan, S., & Thakor, A. (1984). Information reliability and a theory of financial intermediation. Review of Economic Studies, 51, 415-432.
Saunders, A., & Schumacher, L. (2000). The Determinants of Bank interest margins: An international study. Journal of International money and finance, 19, 813-832
Scott, J. A., & Dunkelberg, W.C. (1999). Bank consolidation and small business lending: A small firm Perspective, in Business Access to Capital and Credit Federal Reserve System Research Conference report (pp. 328-361).
Seetanah, B., Seetanah, B., Seetaram, N., Ramessur, S., & Sowkut, R. (2009). Interest rate spread determination in an error correction model. Retrieved;23/09/2008, from www.melbournecentre.com.au.
Stiglitz, J., & Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. American Economic Review, 71, 393-410.
Straka, J. (2000). A shift in the Mortgage Landscape: The 1990s Move to Automated Credit Evaluations. Journal of Housing Research, 11(2), 207-232.
Tennant, D., & Folawewo, A. (2009). Macroeconomic and market determinants of interest rate spreads in low- and middle-income countries Taylor and Francis Journals, 19(6), 489-507.
Tressel, T., & Detragiache, E. (2008). Do Financial Sector Reforms Lead to Financial Development? Evidence from a New Dataset. IMF Working paper Wp/08/265.
Vasanthi, P., & Raja, P. (2006). Risk Management Model: An Empirical Assessment of the Risk of Default. International Research Journal of Finance and Economics, 1 1450-2887.
Vera, Z.-S., L, & Andreas, F. (2007). Efficiency and stability trade off; A case for high interest rate spreads in Venezuela. The Developing Economics Journal, 14(1), 1-26.
Vigano, L. (1993). A Credit Scoring Model for Development Banks: An African Case Study Savings and Development, 17(4), 441-482.
Wheaton, W., Torto, R., J, S., & Hopkins, R. (2001). Evaluating Real Estate Risk: Debt Applications. Journal of Real Estate Finance, 18(3), 29-41.
Wong, K. P. (1997). The determinants of Bank interest margins under credit and interest risks. Journal of Banking and finance, 21, 251-271.
Wyplosz, C. (2001). How Risky is Financial Liberalization in the Developing Countries? . G-24 Discussion Paper Series, No. 14.
DOI: http://dx.doi.org/10.61426/sjbcm.v2i2.149
Refbacks
- There are currently no refbacks.
This work is licensed under a Creative Commons Attribution 3.0 License.
PAST ISSUES:
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.