Effective Interest Rate and Financial Performance of Commercial Banks in Kenya
DOI:
https://doi.org/10.47604/ijfa.3633Keywords:
Effective Interest Rate, Financial Performance, Commercial BanksAbstract
Purpose: The collapse of some of the commercial banks in Kenya has sparked concerns over the financial performance of the banking industry in Kenya. Due to this challenge, stakeholders, including creditors, depositors, employees, and investors, have incurred huge financial losses. Interest rates are crucial macroeconomic indicators that significantly influence the cost of capital and borrowing for firms. Understanding how interest rates affect the financial performance of commercial banks holds significance for investors, policymakers, and corporate decision-makers. The study sought to establish the effect of effective interest rates on the financial performance of commercial banks in Kenya.
Methodology: ROA was used as a metric to measure financial performance. The study was guided by the Loanable Funds Theory. The study population comprised all 39 commercial banks in Kenya, employing a descriptive research design utilising a comprehensive dataset spanning ten years, from 2015 to 2024, comprising financial statements of commercial banks in Kenya and interest rate data from the Central Bank of Kenya. A census method was adopted. Data was encoded and processed using statistics software (STATA version 18). Descriptive statistics were produced for all the numerical data. Inferential statistics were employed using the panel regression model. The results were presented using tables.
Findings: The study revealed the R2 value of 0.412, implying that 41.2% of the variations in the perceived financial performance can be explained by the variations in the effective interest rates, while factors not studied in this research contribute 38.8% of the variance in the dependent variable. Panel regression results concluded that effective interest rates have a positive and significant effect on the financial performance of commercial banks in Kenya, with a coefficient value of 0.03910.
Unique Contribution to Theory, Practice and Policy: The study recommended that commercial banks in Kenya and CBK should promote interest rate frameworks that enhance transparency, risk-based pricing, and competitiveness across the banking sector. The study recommends policies that encourage banks to optimise effective interest rates through ethical incorporation of fees and compounding structures, while ensuring full disclosure to borrowers.
Downloads
References
Abdulrehman, A. A., & Nyamute, W. (2018). Effect of mortgage financing on financial performance of commercial banks in Kenya. Journal of International Business, Innovation and Strategic Management, 2(2), 91-122.
Agwayo, F. M., & Muthinja, M. M. (2021). Effect of Payment Mechanism on Cash Transfer For Orphans And Vulnerable Children Program In Kenya: A Case Study Of Busia County. Journal of International Business, Innovation and Strategic Management, 5(3), 160-180.
Ahmed, R., Borio, C., Disyatat, P., & Hofmann, B. (2024). Losing traction? The real effects of monetary policy when interest rates are low. Journal of International Money and Finance, 141, 102999.
Ahmed, S., & Zlate, A. (2014). Capital flows to emerging market economies: A brave new world?. Journal of International Money and Finance, 48, 221-248.
Alabi, A. W., Atanda, F. A., Akintoye, I. R., & Kajola, S. G. (2024). Internally Generated Revenue, Public Debt and Budget Implementation in Nigeria. African Journal of Business & Economic Research, 19(3).
Amato, J. D., & Luisi, M. (2006). Macro factors in the term structure of credit spreads (No. 203). Bank for International Settlements, Monetary and Economic Department.
Anderson, J. P., Habergham, S. M., James, P. A., & Hamuy, M. (2012). Progenitor mass constraints for core-collapse supernovae from correlations with host galaxy star formation. Monthly Notices of the Royal Astronomical Society, 424(2), 1372-1391.
Arkangelo, A. B., Manini, M. M., & Abraham, M. A. (2021). Macroeconomic Variables and Financial Performance of Commercial Banks in South Sudan. The International Journal of Business & Management, 9(12).
Borio, C., Gambacorta, L., & Hofmann, B. (2017). The influence of monetary policy on bank profitability. International finance, 20(1), 48-63.
Bryman, A., & Cramer, D. (2012). Quantitative data analysis with IBM SPSS 17, 18 & 19: A guide for social scientists. Routledge.
Cagan, M., & Mill, A. (2024). Economics 101: From Consumer Behavior to Competitive Markets—Everything You Need to Know about Economics. Simon and Schuster.
Calomiris, C. W., & Jaremski, M. (2016). Deposit insurance: theories and facts. Annual review of financial economics, 8(1), 97-120.
Chakrabarti, M. (2015). Risk analysis and management in Indian banking sector: An overview. International Journal of Informative & Futuristic Research, 2(7), 2133-2143.
Chakraborty, I., Goldstein, I., & MacKinlay, A. (2020). Monetary stimulus and bank lending. Journal of Financial Economics, 136(1), 189-218.
Chemngorem, F., & Njeru, A. W. (2023). Influence of Selected Macro-Economic Factors on Liquidity of Deposit Taking Saccos in Nairobi County. International Journal of Social Science and Humanities Research (IJSSHR) ISSN 2959-7056 (o); 2959-7048 (p), 1(1), 291-302.
Croushore, D. (2015). Teaching an economics capstone course based on current issues in monetary policy. Eastern Economic Journal, 41, 504-512.
Cullis, J., & Morley, B. (2017). A methodology for determining the ‘cash economy’in the European Union via an announcement effect. European Journal of Law and Economics, 44, 113-129.
D’Acunto, F., Hoang, D., Paloviita, M., & Weber, M. (2019, May). Cognitive abilities and inflation expectations. In AEA Papers and Proceedings (Vol. 109, pp. 562-566). 2014 Broadway, Suite 305, Nashville, TN 37203: American Economic Association.
De Carvalho, M. M., Patah, L. A., & de Souza Bido, D. (2015). Project management and its effects on project success: Cross-country and cross-industry comparisons. International journal of project management, 33(7), 1509-1522.
Debbiche, I., & Rahmouni, O. (2015). Does Foreign Capital Enhance Economic Growth In Emerging Countries: Flow Decomposition Approach. The Journal of Applied Business Research Volume, 31, 221-229.
DAOUI, D. (2017). Analysis of the Exchange Rate Volatility Influence on the Share Price: Morocco, as Case Study. Journal of Public Administration, Finance and Law, 114.
Eggertsson, G. B., Juelsrud, R. E., Summers, L. H., & Getz Wold, E. (2023). Negative nominal interest rates and the bank lending channel. Review of Economic Studies, rdad085.
Gagnon, J. E. (2018). A stability-oriented exchange rate policy for China. Peterson Institute for International Economics.
Gallegos-David, A., Lorenzo-Valdes, A., & Trejo-Becerril, B. (2022). Empirical evidence of the monetary approach to the exchange rate determinants under a fully flexible regime: the case of Mexico. International Journal of Monetary Economics and Finance, 15(1), 35-57.
Gikombo, E. M., & Mbugua, D. (2018). Effect of select macro-economic variables on performance of listed commercial banks in Kenya. International Academic Journal of Economics and Finance, 3(1), 80-109.
Hall, R. E. (2018). Low interest rates: Causes and consequences. 50th issue (September 2017) of the International Journal of Central Banking.
Hesse, M. H., & Miyajima, M. K. (2022). South africa: The financial sector-sovereign nexus. International Monetary Fund.
Hogg, I. D., Banks, J. C., Woods, S. M., Gleeson, D., Furlan, E. M., Jerde, C. L., ... & Chadderton, W. L. (2019). Biodiversity genomics: monitoring restoration efforts using DNA barcoding and environmental DNA. In Lake Restoration Handbook: A New Zealand Perspective (pp. 395-417). Cham: Springer International Publishing.
Hossin, M. S. (2023). Interest rate deregulation, financial development and economic growth: Evidence from Bangladesh. Global business review, 24(4), 690-703.
Jawaid, S. T., & Ul Haq, A. (2012). Effects of interest rate, exchange rate and their volatilities on stock prices: evidence from banking industry of Pakistan. Theoretical & Applied Economics, 19(8).
Kengere, Petronilah, Maina Kimani, and Caleb Manyaga. "Interest Rate and Volatility of Share Prices of Firms Listed at the Nairobi Securities Exchange, Kenya." International Journal of Finance and Accounting 8, no. 3 (2023): 22-32.
Khan, W. A., & Sattar, A. (2024). Impact of interest rate changes on the profitability of four major commercial banks in Pakistan. International journal of accounting and financial reporting, 4(1), 142.
Khaled, M. (2022). Why Interest is Halal in Today's World. Available at SSRN 4644937.
Kiganda, E. O. (2018). Effect of macroeconomic factors on commercial banks profitability in Kenya: Case of equity bank limited. Journal of Economics and Sustainable development, 5(2), 46-56.
Kimani, P. (2021). The Effect of Exchange Rate Volatility on the Growth of Tourism Sector in Kenya (Doctoral dissertation, University of Nairobi).
KINYUA, P. K. (2023). Capital Structure, Bank Size And Financial Performance Of Lower Tier Commercial Banks In Kenya (Doctoral dissertation, Karatina University).
Kipngetich, S. B., Kimwolo, A., & Tenai, J. (2021). Financing cash flow, discretionary accruals and stock return of firms listed in Nairobi Securities Exchange, Kenya. Journal of Economics, Finance And Management Studies, 4(12), 2471-2481.
Lavoie, M., & Reissl, S. (2019). Further insights on endogenous money and the liquidity preference theory of interest. Journal of Post Keynesian Economics, 42(4), 503-526.
Lee, K. S., & Werner, R. A. (2018). Reconsidering monetary policy: An empirical examination of the relationship between interest rates and nominal GDP growth in the US, UK, Germany and Japan. Ecological Economics, 146, 26-34.
Lekan, O. K., Adekola, M. J. N., & Braide, S. E. (2018). Bank financing for small and medium enterprises in Nigeria: Mudharabah Vs Usury. Acta Universitatis Danubius. Œconomica, 14(3).
Levrero, E. S. (2021). Estimates of the natural rate of interest and the stance of monetary
Meslier, C., Tacneng, R., & Tarazi, A. (2024). Is bank income diversification beneficial? Evidence from an emerging economy. Journal of International Financial Markets, Institutions and Money, 31, 97-126.
Mishkin, F. S., & Eakins, S. G. (2019). Financial markets. Pearson Italia.
Mkhize, B. (2022). The effect of exchange rate volatility on share prices of the JSE Top 40. University of Johannesburg (South Africa).
Moyo, D., & Tursoy, T. (2020). Impact of Inflation and Exchange Rate on the Financial Performance of Commercial Banks in South Africa. Journal of Applied Economic Sciences, 15(3).
Mugenda, O. (2003). &Mugenda A.(2003). Research methods: quantitative and qualitative approaches, 3-50.
Munir, K., & Perveen, A. (2021). Impact of Total, Internal and External Government Debt on Interest Rate in Pakistan. Journal of Applied Economics & Business Research, 11(1).
Mundell, R. A. (2002). 12 Keynes and Ohlin on the Transfer Problem. Bertil Ohlin: A Centennial Celebration, 1899-1999, 10, 227.
Muigai, R. G., & Cherono, I. (2019). Effect Of Foreign Exchange Rates Volatility On Share Prices Of Listed Firms In Kenya. European Journal of Economic and Financial Research.
Muriithi, J. G., & Muigai, R. G. (2024). Internal Control Systems and Financial Performance of Companies Listed in Nairobi Securities Exchange. European Journal of Economic and Financial Research, 8(3).
Musyoki, J. K. (2023). Effect of Macro-economic Variables on National Saving in Kenya (Doctoral dissertation, University of Nairobi).
Muteru, M. W., & Omagwa, J. (2024). Macroeconomic Dynamics and Profitability of Insurance Firms Listed at Nairobi Securities Exchange, Kenya. Journal of Finance and Accounting, 8(3), 132-148.
Mwaura, A. T. W., Gathenya, J. W. D., & Kihoro, J. (2015). Dynamics of entrepreneurial orientation on the performance of women owned enterprises in Kenya.
Myers, S. C. (2001). Capital structure. Journal of Economic perspectives, 15(2), 81-102.
Nazir, M., Akbar, M., Akbar, A., Poulovo, P., Hussain, A., & Qureshi, M. A. (2022). The nexus between corporate environment, social, and governance performance and cost of capital: evidence from top global tech leaders. Environmental Science and Pollution Research, 1-14.
Ndlovu, B., Faisa, F., Resatoglu, N. G., & Türsoy, T. (2018). The Impact Macroeconomic Variables on Stock Returns: A Case of the Johannesburg Stock Exchange. Romanian Statistical Review, (2).
Ng’ang’a, A. K. (2017). The impact of interest rate capping on the financial performance of commercial banks in Kenya (Doctoral dissertation, University of Nairobi).
Ngatia, B. K., & Mandere, E. N. (2024). Influence of corporate governance practices on performance of commercial banks in Nairobi City County, Kenya. International Academic Journal of Human Resource and Business Administration, 4(4), 82-108.
Ngari, W. (2021). The Effect of Mobile Money on Monetary Policy in Kenya. Available at SSRN 4908675.
Nguyen, T., Tripe, D., & Ngo, T. (2018). Operational efficiency of bank loans and deposits: A case study of Vietnamese banking system. International Journal of Financial Studies, 6(1), 14.
Nielson, D. L., Parks, B., & Tierney, M. J. (2017). International organizations and development finance: Introduction to the special issue. The Review of International Organizations, 12, 157-169.
Nishizawa, T. (2009). Alfred Marshall and the historico-ethical approach. In Marshall and Schumpeter on Evolution. Edward Elgar Publishing.
Njoroge, J. M. (2021). Relationship between agency banking and the financial deepening in Kenya (Doctoral dissertation, University of Nairobi).
Nnenna, O. G., Chidume, A. J., Jeffery, O. C., Chioma, A. V., & Chizoba, O. (2020). Effect of Economic Indicators on the Performance of Small and Medium Scale Enterprises in Nigeria. International Journal of Advances Engineering and Management (IJAEM), 2(04), 413-420.
Nyakundi, D. (2021). Impact of Interest Rates on Firms’ Performance of Heavy Commercial Vehicle Dealers in Kenya (Doctoral dissertation, University of Nairobi).
Nyangor, M. (2020). Effect of gross domestic product on financial performance of collective investment schemes in Kenya (Doctoral dissertation, UoN).
Ochieng, K. O. (2021). Effect of Financial Risk Management Practices on Financial Performance of Deposit Taking Savings and Credit Cooperatives in Nairobi County, Kenya (Doctoral dissertation, University of Nairobi).
Österholm, P. (2016). The Long‐Run Relationship between Stock Prices and GDP in Sweden. Economic Notes: Review of Banking, Finance and Monetary Economics, 45(2), 283-297.
Otwoko, B. E., Maina, K. E., & Kwasira, J. (2021). Analysis of the moderating effect of DT Sacco size on the relationship between interest rate drivers and the financial performance of deposit taking Saccos in Kenya. Journal of Finance and Accounting, 5(1), 16-27.
Pandey, P. (2017). Financing of deficit and economic development in India. ACADEMICIA: An International Multidisciplinary Research Journal, 7(2), 53-61.
Salami, G. O., & Oluseyi, A. A. (2013). Impact of financial sector development on the Nigerian economic growth. American Journal of Business and Management, 2(4), 347-356.
Santos, A. L., & Rodrigues, L. L. (2021). Banks and climate-related information: The case of Portugal. Sustainability, 13(21), 12215.
Scharpf, F. W. (2018). International monetary regimes and the German model (No. 18/1). MPIfG Discussion Paper.
Setshedi, C., & Mosikari, T. J. (2019). Empirical analysis of macroeconomic variables towards agricul-tural productivity in South Africa. Ital-ian Review of Agricultural Economics, 74(2), 3-15.
Windsor, C., Jokipii, T., & Bussiere, M. (2023). The Impact of Interest Rates on Bank Profitability: A Retrospective Assessment Using New Cross-country Bank-level Data. Reserve Bank of Australia.
Yakubu, I. N., & Bunyaminu, A. (2023). Regulatory capital requirement and bank stability in Sub-Saharan Africa. Journal of Sustainable Finance & Investment, 13(1), 450-462.
Yi, K. M., & Zhang, J. (2017). Understanding global trends in long-run real interest rates. Economic perspectives, 41(2), 1-20.
Zulfikar, R., & STp, M. M. (2018). Estimation model and selection method of panel data regression: An overview of common effect, fixed effect, and random effect model. JEMA: Jurnal Ilmiah Bidang Akuntansi, 9(2), 1-10
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2026 Enock Nyakenyanya Nyambane , Waga Cynthia, Roche Charles
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
