RELATIONSHIP BETWEEN INTEREST RATE CAPPING AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KAKAMEGA COUNTY, KENYA

Abstract

Before interest rate capping, commercial banks fixed their basic rates and offered their clients the highest muscle. Such higher payments undermined customers but allowed banks to continue to benefit from huge profit margins. In contrast, the introduction of interest rate capping and how banks have been dissolved has resulted to the drop of profitability. A case of Kenya Commercial Bank Limited in Kakamega County was utilized to evaluate the relationship between interest rate capping and the performance of commercial banks in Kenya. The study's objectives were to; identify the relationship between credit uptake, financial exposure and lending practices and the financial performance of Kenyan commercial banks. A descriptive survey research design was utilized. The study's target population was all staffs in the two KCB branches in Kakamega County; including branch managers, supervisors, and other staffs. To sample 103 prime employees, stratified random sampling was used. Questionnaires were used to gather primary data while secondary data was collected using secondary data schedule. The results revealed that there is significant positive relationship between credit uptake and financial performance of commercial banks in Kenya (r=0.606, P=0.000). Further, there is significant negative relationship between financial exposure and financial performance of commercial banks in Kenya (r=-0.282, P=0.011). Lastly, there was significant positive relationship between loaning practices and financial performance of commercial banks in Kenya (r=0.661, P=0.000). The study concluded that there is significant relationship between interest rate capping and performance of commercial banks in Kenya. The study recommended that management at KCB should balance fees chargeable on each loan product as processing fee to a percentage of the loan to make loans affordable to customers. Furthermore, financial exposure that banks face from risky customers can be reduced by improving on credit management and closer scrutiny to weed out those likely to default. Lastly, customer’s needs should be considered when setting loaning practices such as the levels of interest rates so as to enhance its financial intermediation role. The government, academics, general public, and other stakeholders in the banking business are expected to benefit from the knowledge this research has to offer.

Key Words; Interest Rate Capping, Financial Performance, Credit Uptake, Financial Exposure, Lending Practices, Commercial Banks

CITATION: Ocharo, R. K., & Sangoro, O. (2023). Relationship between interest rate capping and financial performance of commercial banks in Kakamega County, Kenya. The Strategic Journal of Business & Change Management, 10 (2), 1496 – 1507.