The Effect of Lending Interest Rates on the Financial Performance of Commercial Banks in Kenya

Abstract

The paramount significance of a robust banking sector in driving economic growth, executing effective monetary policies, and upholding macroeconomic stability cannot be overstated. This study was centered on discerning the influence of lending interest rates on the financial performance of Kenya's commercial banks from 2015 to 2022. Employing a moderated multiple regression methodology, secondary balanced panel data encompassing 27 mortgage-offering commercial banks and 189 data points were scrutinized. The results of the regression analysis divulged that the autonomous variables explicated a substantial 86.69% (R2=0.8669, p=0.0020) variance in the financial performance of these Kenyan commercial banks. Notably, the coefficient of lending rate manifested as -0.158824, underlining a statistically significant (p=0.0020) association. Consequently, the null hypothesis was invalidated. The research concludes that lending interest rates exert a substantial and adverse impact on the financial performance of commercial banks. It suggests that these banks should react by raising their mortgage lending rates in tandem with increased mortgage provisions, ultimately bolstering profitability and overall financial performance. Escalating lending rates drive the expansion of long-term mortgage loans, thereby augmenting the financial performance of commercial banks.