Interest Rate Capping And Financial Performance Of Commercial Banks In Kenya

ABSTRACT

Interest rate capping is a form of government control in the financial sector. Over the recent years, there has been a decline on the number of countries using this form of control mainly because most countries are aiming at having liberal financial policies. There are several reasons why governments may opt to use interest rate caps, most of which are political and economic. One of them could be to support an industry or sector where there is a market failure or in areas where a greater financial resource is needed. Market failures usually result from market information asymmetries, moral hazards, adverse selections or the inability of financial institutions to differentiate between high risk and low risk clients. Interest rates have a direct effect on the activities of commercial banks because of the strong belief that they affect the financial performance banks. The valuation of bank assets is the most important factor when it comes to the valuation of bank stocks followed by the rise and fall of interest rates. Traditionally, retail banks make money by relying on the relationship between interest rates, deposits and the loans issued to clients. Therefore, it makes sense for financial analysts to focus on bank stocks as the interest rates rise or fall. The performance of commercial banks depends on a wide range of business, but interest rates still play a key role in determining the financial performance of banks. The critical role of interest rates in determining the performance of commercial banks explains why government regulation is one of the factors that affect the return on bank stocks. This study seeks to establish the influence of interest rate capping on the performance of commercial banks in Kenya. It will be based on the following specific objectives; to establish the effect of Central Bank Rate, Banking lending rate and deposit rates on financial performance of commercial banks in Kenya. The study will be based on three theories which include; interest rate parity, Irving fisher theory of interest and expectations theory of interest rate. A descriptive research design will be employed to analyse the findings. The target population of the study will be 42 commercial banks in Kenya. However, 10 banks will be selected through purposive random sampling to form sample size. Secondary data will be collected from the finance, operations and administration departments of the banks at the headquarters and will be analyzed using descriptive and inferential statistics then presented using charts, percentages, frequencies and tables.