Determinants of Interest Rate Spread among Commercial Banks in Kenya

International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue VI, June 2019 | ISSN 2454–6186

Determinants of Interest Rate Spread among Commercial Banks in Kenya

Silas Kiprono Samoei, Edward Kitum Toroitich

Moi University, Kenya

Abstract:-The study intended to find out the determinants of interest rate spread among commercial banks in Kenya; to establish the effect of statutory reserve requirements oninterest rate spread among commercial banks in Kenya; to determine the effect of inflation rate on interest rate spread among commercial banks in Kenya; to examine the effect of exchange rate volatility on interest rate spread among commercial banks in Kenya; and to determine the effect of Treasury Bill Rate on interest rate spread among commercial banks in Kenya.The study used quarterly time series data for the period 2005 to 2014 which was obtained from the Central Bank of Kenya’s published economic reviews.It was revealed that exchange rate volatility and inflation rate is statistically significant in explaining interest rate spreads implying that volatility of the exchange rate does have a significant impact on the banking sector interest rate spreads in Kenya. The Treasury bill rate, the reserves and gross domestic product were also found to significantly affect interest rate spread in the Kenya’s banking sector. It is thus recommended that there is need for policies to deal with reserve requirements as well as putting in place measures to stabilize the exchange rate volatility in Kenya.

I. BACKGROUND OF THE STUDY

An efficient and vibrant financial system is essential ingredients for the growth of an economy (Kohli, 2012). Financial institutions in general and commercial banks in particular, mobilize savings by offering various types of deposit products to savers and channel such savings as loans and advances to borrowers and investors (Sologoub, 2006). The difference between the rates at which banks lend money to borrowers and the rate they are paying to depositors are generally known as interest rate spread (IRS). The efficiency of the banking system is reflected by a series of financial indicators and more importantly by interest rate spread (IRS) and net interest margin (NIM) as was observed by among other key variables (Sologoub, 2006; Kohil, 2012).
According to Crowley (2007) interest rate spread is the difference between the weighted average lending rate (WALR) and the weighted average deposit rate (WADR). Wider spreads are always a proxy for an underdeveloped financial system characterized by inefficiency, lack of competition and higher concentration of the banking sector; among others and the reverse is also perceived to be true (Demirguc Kunt and Huizinga, 1999; Mlachila and Chirwa, 2002).

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