Antecedents of Interest Rate Spread on Loan Portfolio Performance of Listed Commercial Banks in Kenya

Abstract

The study focused on the influence of antecedents of interest rate spread on loan portfolio performance among listed commercial banks in Kenya. The major antecedents of interest rate spread examined in this study were; liquidity, inflation, bank market niche, bank conditionality and operating costs. The dependent variable was loan portfolio performance. The main objective was to establish the influence of the antecedents of interest rate spread on loan portfolio performance among listed commercial banks in Kenya. The study was guided by the following specific objectives: to determine the influence of liquidity on loan portfolio performance of listed commercial banks, to analyze the influence of inflation on loan portfolio performance of listed commercial banks, to establish the influence of bank market niche on loan portfolio performance of listed commercial banks, to determine the influence of bank conditionality on loan portfolio performance of listed commercial banks and to establish the influence of operating costs on loan portfolio performance of listed commercial banks in Kenya. The study was anchored on the Keynes preference theory, the expectations theory, the segmented market theory and modern portfolio theory. Descriptive research design was used for the study. The target population was the listed commercial banks in Kenya licensed by the Central Bank of Kenya and were in operation as on 31st December 2016. The total population was 176 respondents selected purposely from the list of 11 commercial banks grouped according to management level. This study also used stratified random sampling and simple random sampling. The strata were comprised of management and supervisory cadre. Questionnaires were used to collect primary data while secondary and quantitative data was collected from the statistical abstracts and bulletins of both the Central Bank of Kenya and the Kenya National Bureau of statistics. Cronbach’s Alpha reliability test and factor analysis was carried out in order to test the goodness of the research instrument. F-test was used to test the significance of the overall model. Multiple linear regressions were used to analyze data and test the five hypotheses using statistical package for the social sciences (SPSS) version 24. All the hypotheses were tested at 95 percent confidence level (α=0.05). The results indicated that all the five variables namely bank liquidity, inflation, bank market niche, bank conditionality and operating costs had a positive and significant influence on loan portfolio performance of listed commercial banks in Kenya. The study recommends that bankers should make investment in cost-saving and efficient forms of technology to reduce operating costs. The government and policy makers should create sustainable political and macroeconomic environment to boost investors’ confidence in the banking sector which would go a long way in improving the loan portfolio performance amongst listed commercial banks in Kenya. The study also recommends commercial banks to have an effective loan portfolio management strategy which begins with oversight of the risk in individual loans. Listed commercial banks in Kenya should assess their clients and charge interest rates accordingly, as ineffective interest rate policy can increase the level of interest rates and consequently non- performing assets.