Business Risks and Interest Rate Spread Among Kenyan Commercial Banks

Abstract

This study aimed at establishing the relationship between business risks and interest rate spread of commercial banks in Kenya. It was anchored on a study "determinant of interest rate spread of commercial banks in Kenya". Though several variables were studied, this paper specifically concentrated on the effects of business risks on interest rate spread of commercial banks in Kenya. Correlation research approach was undertaken. Questionnaires were used to collect data which was analyzed using SPSS Version 19. After running different tests: reliability tests, factor analysis, descriptive tests, Pearson correlation, model of fitness and regression, the findings revealed that business risks have an influence on the interest rate spread of commercial banks in Kenya. The study recommended participation of all the stakeholders on review of existing policies on stability and soundness of the banking industry. Banks should also explore internally and industry driven strategies that mitigate against some of the bank-specific factors associated with higher spreads. Based on the research findings, it was concluded that business risks played significant role in explaining interest rate spread. It was therefore recommended to the government and policy makers to implement sustainable political and macroeconomic environment to boost investors’ confidence. Commercial banks in Kenya should participate in the interbank market or use the repurchase agreement for government securities to reduce their liquidity risk as it was mentioned to be the greatest source of fear and hence uncertainty in setting high interest rate spread