Influence of Interest Rates Determinants on the Performance of Commercial Banks in Kenya

Abstract

This study sought to investigate the influence of interest rate determinants on the performance of commercial banks in Kenya.Interest rates are the major economic factors that influence the economic growth in an economy.They can be used to control inflation and to boost economic development.The interest rates determinants that were studied are Inflation Rates, discount rates, Exchange Rate and reserve requirement to determine the influence they have on performance of banks.The target population of the study was all 43 commercial banks operating in Kenya.The sample size was 26 commercial banks obtained from the population.The data analysis technique applied in this study was the multiple regression analysis.The results showed that discount rates, inflation rates and exchange rates had positive influence on performance of commercial banks while reserve requirement ratio had negative influence.The study concluded that higher levels of discount rates, inflation rates and exchange rates lead to higher performance in commercial banks in Kenya, higher levels of reserve requirement ratio result in lower bank performance in Kenya.The study recommends that the Central Bank of Kenya should set base reserve requirements that do not pressurize banks in their operations.This will help grow the banking industry in Kenya and hence develop the economy.Lastly, the study recommends that the commercial banks management should strategize on best way to set up discounts rates for their banks as this will go a long way dictating the borrowing and lending culture of the commercial banks in Kenya and in return enhance their performance.

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