Interest Rates Capping and Credit Uptake of Commercial Banks in Kenya

Abstract

In 2016, Kenya enacted the Banking (amendment) Act 2016 which allowed lending interest rates charged by Commercial Banks in Kenya to be fixed at the Central Bank Rate plus a spread of 4% and deposit rates at 70% of the Central Bank Rate. Many banks protested this move since it meant reduced profitability. As a result, commercial banks introduced stringent credit qualification criteria locking out many borrowers who would have otherwise qualified for credit. Therefore, this study sought to establish how interest rate capping affects credit uptake of Commercial Banks in Kenya. The objectives of the study were; to determine the effect of capping lending interest rates, capping deposit interest rates, deposit interest rate spread on credit uptake of commercial banks in Kenya and the moderating effect of inflation risk premium on the relationship between interest rate capping and credit uptake of commercial banks in Kenya. The study was guided by four theories namely: Irving Fisher's Theory of Interest Rates, the Fisher Effect, Loan Pricing Theory and Loanable Funds Theory. The study conducted diagnostic test on multicollinearity normality test and Heteroscedasticity test. The study adopted descriptive research design. The target population for the study was all the 40 licensed commercial banks in Kenya. The sampling frame for the study was all (40) licensed commercial banks in Kenya. This study collected both primary and secondary data because both data reinforced each other. Primary data was collected using semi-structured questionnaires, while secondary data was collected from audited and released financial statements of Commercial Banks in Kenya for the period 2014–2019. The data was analyzed using multiple regressions and descriptive statistics namely: mean median, mode and standard deviation. Quantitative data was presented using tables, pie charts and bar graphs while qualitative data has been presented descriptively. The study established that while capping lending interest rates and interest rate spread had a significant effect on credit uptake of commercial banks in Kenya, capping deposit interest rates was insignificant and the relationship was significantly moderated by inflation risk premium. The study concluded that interest rate spread had the largest effect on credit uptake of commercial banks in Kenya followed by capping lending interest rates and lastly capping deposit interest rates. The study recommends that when formulating policies on interest rate capping, the Central Bank of Kenya should focus more on the lending side as compared to the deposits side. Keywords: Interest rates capping, Credit uptake, Lending interest rates, Deposit interest rates, Interest rates spread, Inflation risk premium.