Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/249505 
Year of Publication: 
2013
Series/Report no.: 
KBA Centre for Research on Financial Markets and Policy Working Paper Series No. 4
Publisher: 
Kenya Bankers Association (KBA), Nairobi
Abstract: 
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. This paper investigates the determinants of interest rate spreads in Kenya's banking sector based on panel data analysis. The empirical results show that bank-specific factors play a significant role in the determination of interest rate spreads. These include bank size based on bank assets, credit risk as measured by non-performing loans to total loans ratio, liquidity risk, return on average assets and operating costs. The impact of macroeconomic factors such as real economic growth and inflation is not significant. Similarly, the impact of policy rate as an indicator of monetary policy is found to be positive but weak. On average, big banks have higher spreads compared to small banks. There is need for explore policy options meant to enhance competition in the industry and measures to break market dominance will be one such option. Further, the banking sector needs to explore internal as well as industry-driven strategies that counter some of the bank-specific factors associated with higher spreads. These could range from diversification of products to investment in cost-saving and efficient forms of technology.
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.