Assessment of the Relationship between Interest Rate Spread and Performance of Commercial Banks Listed In Nairobi Securities Exchange

Benard Kiptoo Rono, Lewis Wakoli Wachilonga and Robert Silikhe Simiyu

International Journal of Financial Economics, 2014, vol. 3, issue 2, 98-112

Abstract: Despite the liberalization of the financial sector, high interest rate spreads is still an issue of concern in a number of African countries, including Kenya. This study investigated the relationship of interest rate spreads on performance of listed commercial banks in Kenya based on published financial statements. The main objective of the study was to assess the relationship of interest rate spread on commercial bank performance in Kenya. The target population of listed commercial banks in Kenya with complete set of publish financial statements was considered. A descriptive survey design and document analysis was used to gather information. Data was extracted from the published annual financial statements and reports from 2007 to 2012. Data collected was summarized, analyzed and presented in tables, trends and bar graphs. Pearson product moment correlation (r) was applied to establish the relationship between interest rate spread and bank performance indicators of Return on Equity, Return on Assets and Non-performance loans expense over the Gross loans and advances. Empirical results indicated that commercial banks adopt different interest rate spreads to cover their costs and earn profit. The findings indicated that there was a significance correlation between interest rate spread and return on assets, interest spread and return on equity, while there was no significance correlation between interest rate spread and non-performing loan expense. The study recommended that CBK should explore policy options meant to minimize operations costs in the banking sector, for banks to set realistic interest rate spread for their clients. Commercial banks should also explore internal as well as industry-driven strategies that counter some of the bank specific factors associated with high interest rate spread and transfer the benefits to customers/ consumers.

Keywords: Interest Rate Spread; commercial bank; Performance (search for similar items in EconPapers)
Date: 2014
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