EFFECT OF INTEREST CAPS LIFT ON FINANCIAL PERFORMANCE OF COMMERCIAL LISTED BANKS IN KENYA
EFFECT OF INTEREST CAPS LIFT ON FINANCIAL PERFORMANCE OF COMMERCIAL LISTED BANKS IN KENYA
Stephena Basweti Bogecho - Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr Julius Miroga - Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
An interest rate cap lift is all about changing or getting rid of a government set limit on the interest rates that banks can charge their customers. In Kenya, these caps were first put in place back in 2016 with the Banking (Amendment) Act, which kept lending rates at 4% above the Central Bank of Kenya (CBK) rate to help make borrowing more affordable. The recent removal of interest rate caps in Kenya has thrown a few curveballs for both commercial banks and borrowers. One of the biggest headaches is the sharp increase in lending rates, which shot up past 13.8% in 2023. This spike has made it difficult for businesses and individuals to afford credit. High-risk borrowers are feeling the pinch the most, as banks are now more inclined to lend to low risk clients, risk-based pricing. The rising cost of borrowing has led to an uptick in non-performing loans (NPLs), with some borrowers struggling to keep up with repayments amid financial pressures. Higher lending rates are driving up the cost of living and squeezing consumer spending, ultimately decline financial performance. These challenges really underscore commercial banks. The general objective of this study were to empirically analyze the effect of interest rate caps lift on financial performance of listed banks in Kenya. The specific objectives included: to determine the effect of lending rate margins on financial performance of financial institutions in Kenya, to assess the effect of risk based pricing on financial performance of financial institutions in Kenya. Financial Liberalization Theory, Signaling Theory and Asymmetric Information Theory were used.The researcher used a descriptive research design to explore how lifting interest rate caps affects the financial performance of banks listed. This study took place at the Nairobi Securities Exchange (NSE. According to the most recent data, there are 10 commercial banks that are listed on the Nairobi Securities Exchange (NSE), out of a total of 38 licensed commercial banks operating in Kenya. The study used a purposive sampling technique to focus on the 10 listed commercial banks in Kenya. The stud gathered secondary data from various sources, including the financial statements of 9 listed banks, their annual reports, publications from the Central Bank of Kenya, and market analysis reports. Pilot study was done at Diamond trust bank using financial reports from 2014 to 2023. The study had 45 unit of observations derived from 9 listed banks and 5 years period of the data collection. Descriptive and inferential statistics was used and the results were presented by tables. The study concluded that the removal of interest rate caps had a profound and positive impact on the financial performance of listed commercial banks in Kenya, primarily through the enhancement of lending rate margins. Banks appear to have leveraged the deregulated lending environment to increase their net interest income, which significantly contributed to improved financial outcomes. However, the findings also highlight that lending rate strategies and credit segmentation efforts had a notable impact on bank performance. This could point to inefficiencies or underdeveloped frameworks in the implementation of these strategies, indicatings that banks may still be operating with conventional pricing and lending models that do not fully exploit risk-based assessments or segmented credit products. It is recommended that regulatory authorities, particularly the Central Bank of Kenya, intensify oversight of lending practices to ensure that banks do not exploit higher interest margins at the expense of consumer welfare. Future research should consider longitudinal studies that examine the effects of interest cap removal across different economic cycles and regulatory changes. It is also recommended to revisit and refine the measurement of lending rate margin to improve its alignment with the scale’s reliability.
