THE EFFECT OF INTEREST RATE CAPPING ON PROFITABILITY OF COMMERCIAL BANKS IN KENYA

Abstract

The objective of the study was to establish the effects of interest rate capping on profitability of commercial banks in Kenya. This study adopted a descriptive study design. This study focused on all the 41 commercial banks which are fully registered by Central Bank of Kenya (CBK) as at 31 December 2017. The study used secondary data on interest rate capping and profitability of commercial banks from financial annual reports of all the respective banks and in the CBK website for the year 2017. The study was carried for period of five years, from 2013 to 2017 financial years. The obtained data was analyzed using Microsoft Excel and SPSS and then presented in graphs, tables and pie charts to enable effective and efficient interpretation. Regression equation was used to establish the effects of interest rate capping on profitability of commercial banks in Kenya. The ANOVA test was done to determine firstly, the effect of independent variables on the dependent variable and secondly, test the mean score differences and then use T – statistic test to establish the likelihood that there is a link between interest rate capping  and profitability which are the main data variables. The study revealed that interest rate capping had effects on profitability of commercial banks in Kenya. The study further established that interest rate capping had a negative effect on profitability of commercial banks in Kenya. The study revealed that, a unit increase in GDP (Economic Growth) and Bank Total Assets would lead to an increase in profitability of commercial banks in Kenya and a unit increase in Interest Rate Cap, Foreign Exchange Rate, and Inflation Rate would lead to a decrease in profitability of commercial banks in Kenya. The study recommends that there is need for the ministry of finance and the Central Bank of Kenya to revisit interest rate cap to ensure that it favors both the borrowers and the lenders to ensure that the banks become profitable and borrowers can access funds at affordable rates which would in turn lead to growth in the country’s economy.  The study also recommends that banks should be very cautious when they are determining interest rate for their loans because low interest rate will lead to decrease their returns and increased interest rate will reduce the number of borrowers. The study recommends that the government should provide a conducive environment that promotes growth as well as development of businesses. This will ensure that the people are able to improve their livelihood and earn more income where the surplus is banked and therefore providing the banks with additional income to provide loans and in return increase its profitability.