Determinants of Interest Rate Spread of Commercial Banks in Kenya

This study sought to investigated the determinants of interest rate spreads in commercial banks of Kenya based on data analysis and quantified the impact of those factors on interest rate spreads. 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. The project involved conducting an intensive study of the banking industry in Kenya. Various aspects contributing to bank interest rate spreads in the banking industry were explored. The research involved collecting data from commercial banks in Kenya, CBK, financial journals and newspapers. The target population was 1036 credit officers. The sample size was 103. Stratified random sampling was used. Questionnaires were used to collect primary data where drop and pick method was used. The data was processed using statistical package for social sciences (SPSS) to get various statistical measures such as the mean, frequencies and standard deviation which were applied in various processes which included validation, sorting, summarizing and aggregation of data. The data collected was analyzed using inferential statistics and descriptive statistics which involved frequencies and mean. The inferential statistics involved the use of Pearsons correlation and regression analysis. The results obtained helped to infer the determinants of interest rate spread in commercial banks of Kenya. Results indicated that all the variables of the study Inflation rate, return on average assets, liquidity risk and credit risk influences interest rates spreads of commercial banks in Kenya. This was evidenced by the responses from respondents in regards to the study variables. The study concluded that indeed inflation rate, credit risk, liquidity ratio and returns on average assets influences interest rates spreads in commercial banks of Kenya by a substantial extent. It was recommended that a similar study should be done in Kenya. Further studies should also be carried out on operation cost and financial performance of commercial banks in Kenya with an aim of finding out their effect on interest rates spreads of the commercial banks.