Phiri Gavin Patrick

This study sought to establish the factors that influence interest rate spreads in commercial banks in Kenya. The study adopted a descriptive and quantitative research design on a sample of 15 commercial banks in Kenya which accounted for 85% of all the loans disbursed between 2002 and 2009. The study used secondary data obtained from the Banking Survey publication, Africa Development indicators and the Central Bank of Kenya and used both quantitative and qualitative techniques in data analysis to examine the impact on intermediary efficiency of a set of bank specific and macroeconomic variables. The results suggest that intermediary efficiency is affected by bank market share of assets, overheads, return on assets, liquidity, market share of loans and proportion of non interest income to total income. There is evidence of capital adequacy ratio, treasury bills rate and the discount rate also having a significant impact on interest rate spreads.

The study could not find evidence to support the impact of  market share of deposits, inflation and cash reserve ratios on banking interest rate spreads. The study concludes that the bank-specific factors are the most significant factors influencing interest rate spreads of commercial banks in Kenya than macroeconomic factors. It reveals that there are two types of spread; one influenced by commercial bank ability to mobilize funds at a lower cost and one influenced by high non operational costs (overheads).  Interest rate spreads influenced by ability to mobilize funds at a low cost are usually associated with large banks by market share of assets. These banks use their vast market outreach to mobilize deposits at low rates and still maintain high lending rates allowing them to earn huge profits that have characterized the high end of the banking sector in the country in recent years. The second type of spread is driven by the need to cover high overheads that banks incur in the course of their quest to remain competitive. These costs include high wages that banks pay in order to attract the best and innovative employees in the market. The banks pass these high overheads on to their customers in the form of interest rate spreads.