INTEREST RATE VOLATILITY ON PROFITABILITY OF COMMERCIAL BANKS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA
INTEREST RATE VOLATILITY ON PROFITABILITY OF COMMERCIAL BANKS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA
Ruth Glory Wairimu Irungu - MBA Student, Department of Accounting and Finance, School of Business and Economics, Catholic University of Eastern Africa, GABA Campus, Kenya
Dr. Irene Cherono - Lecturer, Department of Accounting and Finance, School of Business and Economics, Catholic University of Eastern Africa, GABA Campus, Kenya
Dr. Dickson Singoei - Adjunct Lecturer, Department of Accounting and Finance, School of Business and Economics, Catholic University of Eastern Africa, GABA Campus, Kenya
ABSTRACT
This study was designed to examine the effect of interest rate fluctuation on profitability of commercial banks listed on Nairobi Securities Exchange (NSE), Kenya with non-performing loans ratio (NPLR) playing the moderating variable. This research was an explanatory study and quantitative. The secondary data for 10 commercial banks listed on the NSE for 24 periods was analyzed, which gave a total of 240 observations. Profitability was determined by Return on Equity (ROE) whereas the other variables were determined by the standard deviation of the respective rates. The definition of non-performing loans ratio: non-performing loans to total gross loans. The technique used was descriptive statistics, correlation analysis, diagnostic test and panel regression analysis. The Cointegration specification test revealed that the model used was Panel Dynamic Least Squares (DOLS) model which included bank-specific characteristics that were not observed. The results revealed that lending rate volatility was a positive and statistically significant influence on bank profitability. The profitability was also positively and statistically insignificantly affected by the volatility of Central Bank Rate. The effect of the deposit interest rate volatility was positive but not statistically significant, while the effect of the volatility of the interest rate difference was negative and not statistically significant. The results of moderation analysis indicated that the direct effect of interest rate volatility toward ROE was positive and statistically significant, while the direct effect of NPLR in the presence of interest rate volatility toward ROE was negative but not statistically significant at 5%. The findings of the study suggest that the profitability impact of interest rate volatility is dependent on the source of volatility and that the bank's interest rate risk management and credit risk management are needed to ensure bank profitability. The findings of the study reveal that the policy of the banks must be strengthened in financial stability and prudent credit management with the support from the regulation and policy and the management of interest rate risk and monitoring of asset quality must be improved.
