Effect of interest rate capping on Financial Performance of Commercial Banks in Kenya: A case of tier one Commercial Banks in Nairobi County

Abstract

The financial performance of commercial banks is partly obsessed with interest unfold, the distinction in interest rates charged on loans and what’s paid to suppliers of funds. Charge per unit volatility includes a negative impact on the financial performance of commercial banks motility a challenge to banks managers in their core operations of credit management and profit. On the other hand, an increase in interest rates interprets to higher returns on new investments, exaggerated profit margins ion loans, and improved earnings from trading. The purpose of the study was to assess the effect of interest rate capping ion financial performance of tier one commercial banks in Kenya. It focused on credit supply, interest cost, interest rate spread and interest income and financial performance. The targeted population of the study was five hundred employees of tier one commercial banks in Kenya in the ranks of senior management, middle management, and lower-level management. Eighty (80) respondents were sampled using stratified sampling method. Primary data was collected with the help of self-administered questionnaires. The collected data was cleaned, edited and analyzed using SPSS statistical tool. To assess the effect of interest capping on the performance of the banks, descriptive statistics, Pearson’s correlation and regression analysis were used. The multiple regression results revealed that the identified interest rate capping factors had a significant positive relationship with the performance of commercial banks (R = i0.757). The coefficient of determination (R2) revealed that the identified interest rate capping factors collectively explained i57.4% ion the performance of commercial banks, while i42.6% could be explained by other factors beyond the study. It was concluded that credit supply, cost of interest, interest rate spread and interest income influenced the financial performance of tier one commercial banks in Kenya. It was recommended that interest rate capping being a norm practiced all over world should be upheld to regulate the financial sector effectively so that people and companies can borrow and improve businesses which in effect grows the economy. Banks can benefit from growth on number and volume of borrowings thus making more profits.