The Determinants of Interest Rates Spread in Kenya
Keywords:
bank specific factors, macroeconomic factors, interest rate spread, industrial factorsAbstract
Purpose: The main objective of the study was to analyze the determinants of interest rate spread in the Kenyan economy. Its specific objectives were to establish the bank specific factors macroeconomic factors and industry specific factors that influence the interest rate spread in Kenya.
Methodology: This study analyzed the determinants of interest rate spreads in Kenya by focusing on eight banking institutions that significantly control deposits and loans market. The study used panel least squares estimation technique on annual data between years 2002 to 2011 to analyze the determinants of interest rates spreads as grouped in literature under: Bank-Specific Factors, Industry-specific data and Macroeconomic factors. The study was carried out using panel quantitative data analysis which involved the panel unit root test; Levin-Lin Chu and Im-Pesaran-Shin Tests and among other diagnostic tests including normality test, heteroscedasticity, Multicollinearity and Hausman tests. The study also used descriptive statistics such as mean, standard deviation. Due to the nature of the study STATA software was used to analyze the data. The analyzed data was then presented using figures, tables and graphs.
Results: Among the bank specific factors the results revealed that non interest income, nonperforming loans and loan asset ratio were significant. In addition among the industry specific factors liquid asset ratio and loan asset ratio were significant. While the finding revealed that only Treasury bill was significant among the macroeconomic factors. These results imply that non interest income, nonperforming loans and loan asset ratio greatly affect interest rate spread negatively. While liquid asset ratio and loan asset ratio greatly contributes to the interest rate spread negatively.
Unique contribution to theory, practice and policy: Several recommendation emanate from the study. Firstly, the high responsiveness of banks spreads to the proxy for the Treasury bill suggests that deregulation must eventually take place. Secondly, banks must continue to seriously deal with the issues of the high levels of non- performing loans and the diseconomies of scale in their operations. Thirdly, if there is to be any success in reducing banks’ interest rate spreads to support long- term economic growth, the competitive environment in the banking system must be enhancedDownloads
References
Angbazo, L. (1997). Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking. Journal of Banking and Finance, 21(1), 55-87.
Bawumia, M., Belnye, F., and Ofori, M. E. (2005). The determination of bank interest spreads in Ghana: An empirical analysis of panel data. African Development Review, 20(3), 378-399.
Beck T.,Cull R.,and Gatenga, (2010), “Banking sector stability, efficiency and outreach in Kenya” world bank, Nairobi,WPS5442
Belsley. David A.. Edwin Kuh and Roy E. Wdrh. (1980. Regression diaptics: Identifytng influcntutl datr and souras of collinearity. (Wiky. New York. NY L
Brock, P. L., and Rojas Suarez, L. (2000). Understanding the behavior of bank spreads in Latin America. Journal of development Economics, 63(1), 113-134.
Brock, P., and Franken, H. (2002). Measuring the determinants of average and marginal bank interest rate spreads in Chile, 1994-2001. University of Washington Economics Working Paper, 25, 2002.
Chirwa, E. W., and Mlachila, M. (2004). Financial reforms and interest rate spreads in the commercial banking system in Malawi. IMF Staff papers, 96-122.
Da Silva, G. J. C., Oreiro, J. L., de Paula, L. F., and Sobreira, R. (2007). Macroeconomic Determinants of Banking spread in Brazil: An Empirical Evaluation Proceedings of the 35th Brazilian Economics Meeting No. 098.Brazilian Association of Graduate Programs in Economics.
Dabla-Norris, E., and Floerkemeier, H. (2007). Bank efficiency and market structure: what determines banking spreads in Armenia? .IMF Working Papers, 1-28.
Eita, J. H. (2012). Explaining Interest Rate Spread In Namibia. International Business & Economics Research Journal (IBER), 11(10), 1123-1132.
Field C.A. and Ronchetti Hayward,CA (1999). Small Sample Asymptotics. IMS Lecture Notes, Monograph Series, 13.
Ghosh, S. (2008). Regulatory Pressure, Market Discipline, and Bank Spreads in India: An Empirical Exploration. Global Economic Review, 37(2), 227-247.
Ho, T.S.Y. and Saunders, A. (1981). ‘The determinants of bank interest margin: theory and empirical evidence. ‘Journal of Financial and Quantitative Analysis’ XVI(4):581–599
Hoang, N. T., & McNown, R. F. (2006). Panel data unit roots tests using various estimation methods. University of Colorado Bulletin, 6, 33-66.
Hossain, M. (2012). Financial reforms and persistently high bank interest spreads in Bangladesh: Pitfalls in institutional development? Journal of Asian Economics, 23(4), 395-408.
India: An Empirical Exploration, “Global Economic Review, 37(2), 227- 247.
Klein, M. A. (1971). A theory of the banking firm. Journal of money, credit and banking, 3(2), 205-218.
Maudos, J., and Fernandez de Guevara, J. (2004). Factors explaining the interest margin in the banking sectors of the European Union. Journal of Banking and Finance, 28(9), 2259-2281.
Perez, P. (2011). Determinants of Interest Rate Spreads in Belize. Central Bank of Belize, Working Paper, (1).
Quaden, G. (2004). Efficiency and stability in an evolving financial system. In Speech at the National Bank of Belgium Conference.
Robinson, J. W. (2002). Commercial Bank Interest Rate Spreads in Jamaica: Measurement, Trend and Prospects. Kingston: Bank of Jamaica.
Samahiya, M., and Kaakunga, E. (2014). Determinants of Commercial Banks’ Interest Rate Spread in Namibia: An Econometric Exploration. Botswana Journal of Economics, 12(1), 1-10.
Saunders, A., and Schumacher, L. (2000). The determinants of bank interest rate margins: an international study. Journal of international Money and Finance, 19(6), 813-832.
Tushaj, A. (2010). Market concentration in the banking sector: Evidence from Albania (No. 73). BERG Working paper series on government and growth.
Valverde, S. C., del Paso, R. L., and Fernandez, F. R. (2004). Banks, financial innovations and regional growth. UN University, Institute for New Technologies.
Poghosyan, T., & Poghosyan, A. (2010). Foreign bank entry, bank efficiency and market power in Central and Eastern European Countries1. Economics of Transition, 18(3), 571-598.
Downloads
Published
How to Cite
Issue
Section
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.
