INFLUENCE OF CREDIT RISK ON INTEREST RATE MARGINS IN THE MIDST OF CAPPING AMONG COMMERCIAL BANKS IN KENYA

ABSTRACT : Interest rate margin is one of the critical component in the lending decision process ofcommercial banks. Commercial banks are independent business entities that set their own interest rate marginbased on the central bank base rates. The aim of this study was to analyze bank specific determinantsinfluencing bank margins interest rates in the midst of capping among commercial banks in Kenya usingsecondary data for the period 2013 to 2018, a period characterized by unrestricted and restricted interest ratecap. The specific objectives was to analyze the influence of: credit risk, on interest rate margins. The studyadopted exploratory research design. Panel data was employed using annual data over the period before interestrate, covering 2013-2015, and after capping of interest rate, covering 2016 to 2018.Thirty-eight commercial banks in Kenya which were in normal operation as at 31st December 2018 were usedgiving 228 firm observations. Interest rate margins was informed by Dealership Model and its extensions whileanalyzing the influence of bank specific determinants, that is, credit risk, capital adequacy, operation efficiencyand liquidity risk on interest rate margins. Applying STATA 13.0 employing Dynamic Stochastic GeneralEquilibrium modeling, Generalized Method of Moments approach was used in the analysis.Descriptive statistics in form of pie charts, graphs, and summary statistics were presented. Inferential statisticswas analyzed using regression analysis to establish the influence of bank specific economic determinants on theinterest rate margin. The findings would be useful to policy makers, shareholders, customers in the respectivecommercial banks in Kenya. The government could also utilize the findings in making policies affectingcommercial banks in Kenya which could have an impact on interest rate margin.

KEY WORDS: Credit Risk, Interest Rate Margins