The Effects of Interest Rate Spread on the Level of Non-Performing Assets: A Case of Commercial Banks in Kenya.

Kenneth Wanjau and Ngetich Collins.

Abstract

This study sought to establish the effects of interest rate spread on the level of Non Performing Assets in commercial banks in Kenya. This study adopted a descriptive research design on a sample of all commercial banks in Kenya operating by 2008 which are 43 in number. The study used questionnaires to collect data from primary data sources and secondary data, collected from Bank Supervision Report, to augment the primary data findings. The study used both quantitative and qualitative techniques in data analysis to the relationship between the interest rate spread and loan non-performance. The data were presented using graphs, table and pie-Charts. The study concludes that interest rate spread affect performing assets in banks as it increases the cost of loans charged on the borrowers, regulations on interest rates have far reaching effects on assets nonperformance, for such regulations determine the interest rate spread in banks and also help mitigate moral hazards incidental to NPAs. Credit risk management technique remotely affects the value of a bank‟s interest rates spread as interest rates are benchmarked against the associated nonperforming assets and non-performing assets is attributable to high cost of loans. The study recommends that 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 NPAs. They apply stringent regulations on interest rates charged by banks so as to regulate their interest rate spread and enhanceperiodic/regular credit risk monitoring of their loan portfolios to reduce the level of NPAs.

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