EFFECT OF INTEREST RATE CAPPING ON OPERATING PERFORMANCE

INDICATORS OF COMMERCIAL BANKS IN KENYA: A CASE STUDY OF

KCB BANK (KENYA) LIMITED

BY

FELIX O. OKWANY

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

SUMMER 2017
EFFECT OF INTEREST RATE CAPPING ON OPERATING PERFORMANCE
INDICATORS OF COMMERCIAL BANKS IN KENYA: A CASE STUDY OF
KCB BANK (KENYA) LIMITED

BY

FELIX O. OKWANY

A Research Project Report Submitted to the School of Business in Partial Fulfillment of

the Requirement for the Degree of Masters in Business Administration (MBA) -
Finance

UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA

SUMMER 2017

ii
 STUDENT DECLARATION

I, Felix Ochieng Okwany, declare that this is my original work and has not been
submitted to any other college, institution or university other than the United States
international university in Nairobi for academic purposes in partial fulfillment of the
requirements for the award of Masters of Business Administration (MBA – Finance).

Signed………………………….. Date……………………………………………..……

Felix Okwany (ID 647543)

This project has been presented for academic purposes with my approval as the appointed
supervisor

Signed …………………………….. Date……………………………………...…………..

Lecturers name: Dr. Elizabeth Kalunda

Signed……………………………… Date…………………………………...…………….

Dean School of Business

 COPYRIGHT

Felix Okwany

All rights reserved

iv
 ABSTRACT
The main purpose of this study was to investigate the effects of interest rate capping on
the operating performance of commercial banks in Kenya with a case study of KCB Bank
Kenya Limited (KCB-K). Exploratory research was directed by three specific objectives
namely: the effect of capping of interest rate on credit uptake performance of the bank,
the effect of interest rate capping on bank profitability of KCB-K and the effect on
performance of the portfolio of non-performing loans in KCB-K. The scope of the study
was limited to a case study of KCB Bank Kenya. Literature review on the three specific
objectives was identified done in detail in chapter two. Descriptive research design was
applied in the study. The targeted population in the study was the employees of KCB-K at
selected branches and Head Office functions. Questionnaires were used for data
collection and were self-administered. One sample-statistics and MS Excel were used to
establish the significance of the findings. Frequency tables were used to summarize data
into percentages and frequency distributions. Pie charts were used for data presentation.
SPSS (Statistical Package for the Social Sciences) and Microsoft Excel were used for data
analysis. The sample size of the study was 60 employees of KCB bank branches located
in Nairobi County. The main findings of the research were that interest rate capping
decreased credit uptake, led to a reduction in the number of approved loan facilities,
increased selection criteria for new loans and had an effect on increase in non-performing
loans. Conclusions of the study were that interest rate capping lead to reduced credit
uptake, reduced bank profitability and led to increase of non-performing loans due
decline of new approved loans. The study recommends further studies to be done
including more banks in the industry since this study focused on the KCB Bank in Kenya.
Further research should be undertaken to investigate the effect that reduction in credit
uptake is having on businesses, how banks are responding to the reduction in profitability
and actions that result from the same such as reduction in overhead costs and job losses.
Further research should be undertaken on the effect of increase in non-performing loans
in the financial services industry and the economy. Finally, a research should also be
undertaken to investigate the effect of interest rate capping on informal lending, financial
inclusion and key macroeconomic variables of inflation and foreign exchange rate.

v
 ACKNOWLEDGEMENT
I thank almighty God for guiding me through my education. I also appreciate my
supervisor Dr. Elizabeth Kalunda for support and guidance through this research study.
Finally I give special thanks to my parents for continued support and inspiration all
through my studies. God bless them all abundantly.

Felix Okwany
USIU, Summer 2017

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 TABLE OF CONTENTS

STUDENT DECLARATION...........................................................................................iii
COPYRIGHT .................................................................................................................... iv
ABSTRACT ........................................................................................................................ v
ACKNOWLEDGEMENT ................................................................................................ vi
TABLE OF CONTENTS ................................................................................................vii
LIST OF FIGURES .......................................................................................................... ix
LIST OF TABLES ............................................................................................................. x
CHAPTER ONE ................................................................................................................ 1
1.0 INTRODUCTION ......................................................................................................... 1
1.1 Background of the Study ............................................................................................... 1
1.2 Statement of the Problem ............................................................................................... 5
1.3 Purpose of the Study ...................................................................................................... 7
1.4 Research Objectives ....................................................................................................... 7
1.5 Importance of the Study ................................................................................................. 7
1.6 Scope of the Study ......................................................................................................... 8
1.7 Definition of Terms........................................................................................................ 8
1.8 Chapter Summary ........................................................................................................ 10
CHAPTER TWO ............................................................................................................. 11
2.0 LITERATURE REVIEW ......................................................................................... 11
2.1 INTRODUCTION ....................................................................................................... 11
2.2 Effect of Capping Of Interest Rate on Credit Uptake .................................................. 11
2.3 Effect of Interest Rate Capping On Bank Profitability ................................................ 15
2.4 Effects of Interest Capping On Non-Performing Loans .............................................. 20
2.5 Chapter Summary ........................................................................................................ 24
CHAPTER THREE ......................................................................................................... 25
3.1 INTRODUCTION ....................................................................................................... 25
3.2 Research Design........................................................................................................... 25
3.3 Population and Sampling Design ................................................................................. 26
3.3.1 Population ................................................................................................................. 26
3.3.2 Sampling Design ....................................................................................................... 26
3.3.2.1 Sampling Frame ..................................................................................................... 26
3.3.2.2 Sampling Technique .............................................................................................. 26

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3.3.2.3 Sample Size............................................................................................................ 27
3.4 Data Collection Method ............................................................................................... 27
3.5 Research Procedures .................................................................................................... 28
3.6 Data Analysis Methods ................................................................................................ 28
3.7 Chapter Summary ........................................................................................................ 29
CHAPTER FOUR ............................................................................................................ 30
4.0 RESULTS AND FINDINGS ..................................................................................... 30
4.1 INTRODUCTION ....................................................................................................... 30
4.2 Demographic Information ............................................................................................ 30
4.2.2 Reliability.................................................................................................................. 30
4.3 Effect of Capping Of Interest Rate on Credit Uptake ................................................. 32
4.4 Effect of Interest Rate Capping On Bank Profitability ................................................ 38
4.5 Effect of Interest Rate Capping On the Portfolio of Non-Performing Loans .............. 42
4.6 Inferential statistics ...................................................................................................... 49
4.6.1 Correlation ................................................................................................................ 49
CHAPTER FIVE ............................................................................................................. 51
5.0 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS ...................... 51
5.1 Introduction .................................................................................................................. 51
5.2 Summary ...................................................................................................................... 51
5.3 Discussion .................................................................................................................... 52
5.4 Conclusion ................................................................................................................... 57
5.5 Recommendations for Practice and Further Studies ................................................... 59
REFERENCES ....................................................................................................................... 62
APPENDICES ....................................................................................................................... 74
APPENDIX A: COVER LETTER ............................................................................................. 74
APPENDIX B: QUESTIONNAIRE ......................................................................................... 76
APPENDIX C: SPECIFIC OBJECTIVE ONE CORRELATION TABLE ......................................... 81
APPENDIX D: SPECIFIC OBJECTIVE TWO CORRELATION TABLE ....................................... 82
APPENDIX E: SPECIFIC OBJECTIVE THREE CORRELATION TABLE ..................................... 83

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 LIST OF FIGURES
Figure 4. 1Demographic data ............................................................................................. 31
Figure 4. 2 Position in the Bank......................................................................................... 31
Figure 4. 3The number of approved loans have increased since the law came into effect 33
Figure 4. 4The bank’s liquidity has improved since the interest rate cap law came into
effect .................................................................................................................................. 36
Figure 4. 5 Capping of interest rates has led to an increase in bank profitability.............. 39
Figure 4. 6 Other bank charges have increased since the law came into effect ................. 40
Figure 4. 7 Loan loss provisions have greatly increased since the rate cap law came into
effect .................................................................................................................................. 43
Figure 4. 8 Non-performing loans have slowed the growth rate of loans in the bank ....... 46

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 LIST OF TABLES
Table 4. 1Response rate ..................................................................................................... 30
Table 4. 2 Reliability.......................................................................................................... 30
Table 4. 3 Bank had many borrowers before the capping of interest rates ........................ 32
Table 4.4 Number of new borrowers has increased since the law came into effect .......... 33
Table 4. 5 The selection criteria for new loans has increased since the law came into
effect .................................................................................................................................. 34
Table 4. 6 Interest Rate Capping Law has aided in increasing financial inclusion ........... 34
Table 4. 7 Informal Lending has increased since the law came into effect ....................... 35
Table 4. 8 Bank has slowed down on lending since the law came into effect ................... 36
Table 4. 9 Selection criteria for new loans is now more strict since the law came into
effect .................................................................................................................................. 37
Table 4.10 Interest Capping Forces Banks to Have Intense Selection during Lending .... 37
Table 4. 11 Interest income has increased since the law came into effect. ....................... 38
Table 4. 12 Loan loss provisions have reduced since the law came into effect ................ 39
Table 4. 13 The default rate has increased since the law came into effect ........................ 39
Table 4. 14 Interest rate capping has led to reduction in liquidity/funds available for
lending................................................................................................................................ 41
Table 4. 15 Capping of interest rates and marketability of the bank ................................. 41
Table 4. 16 Number of non-performing loans has increased since the law came into effect
............................................................................................................................................ 42
Table 4.17 Recoveries on non-performing loans after the law came into effect ............... 42
Table4.18 Proposals and requests to restructure credit facilities have increased since the
law came into effect ........................................................................................................... 44
Table 4. 19 There has been increased time spent in managing non-performing loans since
the law came into effect. .................................................................................................... 45
Table 4. 20 Interest rate capping and recovery of non-performing loans .......................... 45
Table 4. 21 Non-performing loans and bank`s ability of making profits. ......................... 46
Table 4. 22 Summary of means and standard deviation of the responses ......................... 47
Table 4. 23 Correlation Analysis ....................................... Error! Bookmark not defined.

x
 LIST OF ABBREVIATIONS

ATMs – Automated Teller Machines

CBK – Central Bank of Kenya
CBR – Central Bank Rate
CRB – Credit Reference Bureaus
FOREX – Foreign Exchange
KCB-K – KCB Bank Kenya Limited
KBRR – Kenya Bankers’ Reference Rate
MFBs – Microfinance Banks
MRPs – Money Remittance Providers
NIMs – Net Interest Margins
ROA – Return on Assets
SME – Small and Medium Enterprise
SSA – Sub-Saharan Africa

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 CHAPTER ONE
1.0 INTRODUCTION

1.1 Background of the Study

Commercial Banks play a pivotal role in the distribution and allocation of economic
resources of a Country. As intermediaries, banks facilitate movement of funds from
depositors to borrowers (Ongore, 2013). In order to perform the intermediation function
properly, banks must generate income sufficient enough to cover their operational costs
incurred in the process. Despite the recent trends of financial disintermediation and the
growth in market-based finance, the role of banks is still essential to the performance and
operation of modern economies (Dietrich & Wanzenried, 2010).

Literature on bank-lending channel has long shown that economic activity is seriously
hampered if commercial banks which are the most significant agents in the credit markets
cannot execute their lending function properly. It is therefore well considered and
understood that beyond intermediation; the financial performance of banks has direct
implications on performance and growth of economies in different countries. Sustained
growth in profitability and performance also ensures continued reward for investors and
shareholders which encourages increased investment that spurns economic growth.
Because a profitable banking sector is better able to perform its lending function, a
banking sector that is profitable makes a significant contribution to the stability of the
encompassing financial system. Conversely, poor banking performance leads to banking
failure and ultimately crisis in growth of economies. For this reasons, the performance of
commercial banks has been an area of interest in academic research since the Great
Depression of the 1940’s. The financial crisis of 2008 which started in the United States
and which had effects that spiraled globally, further highlighted the crucial role that banks
play in the global economy.

One of the most important parameters considered in evaluating the performance of banks
is profitability. Studies done in the last two decades have shown that commercial banks in
Sub-Saharan Africa (SSA) with an average return on assets (ROA) of 2 percent (Flamini,
Mcdonald, & Schumacher, n.d.). In this study, one of the major reasons highlighted for
the seemingly better performance of banks in SSA was investment in high risk ventures.
The other reason cited for high profitability of commercial banking business in SSA was

1
the existence of a huge gap between the demand for bank service and the supply thereof.
This means that in SSA, the number of banks is few compared to the demand for the
services and as a result there is less competition and banks charge higher interest rates.
This is especially true in East Africa where few government-owned banks take the lion’s
share of the market. Financial inclusion is growing in SSA but there are still opportunities
for growth. The performance of commercial banks can be affected by both internal and
external factors (Al-tamimi, 2010). These factors can be classified into those which are
considered directly attributable to the bank itself (internal) and macroeconomic variables
(external) which includes factors such as interest rates, exchange rates and inflation.
Internal factors are bank-specific characteristics that influence bank performance and are
influenced by internal decisions of the board and management of the bank. External
factors are industry-wide which are beyond the control of the company and which have a
direct effect on the profitability of the bank such as the macroeconomic variables noted.
Studies also show that performance of banks can also be influenced by ownership identity
as either foreign or indigenous local bank (Ongore, 2013).

Interest rate is one of the most important factors that have an influence on the
performance of banks. Interest rate is the price a borrower pays for use of money that they
borrow from a lender or a financial institution or fee paid on borrowed assets(Crowley,
2010). Interest rate is also defined as the amount of interest due per period as a proportion
of the amount lent, deposited or borrowed (United States, 2011). Interest rates play an
important role in the growth of economies and have a direct effect on the returns on
investments achievable from different financial instruments. Interest rate is an economic
tool that is used to control inflation and to boost economic development (Corb, 2012). It
is widely believed that fluctuations in market interest rates exert influence on
performance of commercial banks. Interest rates have a direct influence on credit uptake
given that higher interest rates lead to decreased level of credit appetite from the resultant
high cost of borrowing. Higher interest rates also result in increased probability of default
as borrowers will struggle to meet payment obligations under their loan facilities.
Ultimately, the level of credit uptake and increased risk of default at different levels of
interest rate directly affects bank performance and overall profitability.

Under general conditions, bank profitability increases with increase in interest rates.
Mang’eli (2012) argued that the banking system as a whole is immeasurably helped rather

2
than hindered by an increase in interest rates. Financial performance of banks is evaluated
based on profitability. The most popular profitability measures are; profit margin on sale,
return on equity and return on investment ratios. Banks make profit on the difference
between what they incur to borrow funds and the rate at which they on-lend the funds
borrowed from depositors. Since the financial crisis of 2008 and the stock market decline
that followed, interest rates have been maintained at extremely low levels by the USD
Federal Reserve (Pelsser, 2010). The Federal Reserve controls short-term interest rates.
Buying and selling in the bond market establishes longer term rates, including bench
mark ten-year US Treasury Rates.

Interest rates are affected by demand and supply, inflation rates, the type of loan, increase
in income, monetary policies, economic growth and uncertain economic future.
According to Horcher (2006), an increase in demand for credit is inversely related to the
interest rate. When customers fail to pay their loans on time, the amount of credit
available also decreases (Kodongo & Ojah, 2012). Increase in inflation rates also causes
an increase in the interest rates as the purchasing power of money decreases. Secured
loans are offered at lower interest rates compared to unsecured loans. Additionally, when
wage rates rise, interest rates also increase (Corb, 2012).

With a thriving economy, the demand for credit increases as do the interest rates. External
factors such as elections, new government and changing government policies also have a
direct effect on interest rates and increased risk of loan defaults and non-performing loans
which affect performance of banks. Lenders secure themselves against the increased risk
of default brought about by these factors by pegging the pricing on credit facilities to the
likelihood of default such that higher risk unsecured loans attract higher interest rates than
lower risk secured loans advanced to borrowers with a good track record of payment. The
higher the risk of default, the higher the interest rates (Horcher, 2006).

In Kenya, the banking sector plays an important role in the financial services sector,
particularly with respect to mobilization of savings and extending credit. African
countries, particularly at the bank level like Kenya have for a long a period of time been
grappling with the challenge of high interest rates which stifles investment through credit
and economic growth. According to the banking supervision annual report (2015) the
banking sector comprised of the Central Bank of Kenya, as the regulatory authority, 43

3
banking institutions where 42 are commercial banks and 1 mortgage finance company, 8
representative offices of foreign banks, 12 Microfinance Banks (MFBs), 3 Credit
Reference Bureaus (CRBs), 15 Money Remittance Providers (MRPs) and 80 Foreign
Exchange (Forex) Bureaus. Out of the 43 banking institutions, all commercial banks, 10
were local subsidiaries of foreign banks while 4 were branches of foreign banks. All
licensed microfinance banks, credit reference bureaus, forex bureaus and money
remittance providers were privately owned. The banking industry in Kenya is governed
by the Companies Act, the Banking Act, the Central Bank of Kenya Act and various
prudential guidelines issued by the CBK. The Kenyan Government adopted the CBK
Amendment Act in 2001 which allows the CBK to regulate interest rates.

In the Kenyan banking sector, the last decade has witnessed drastic changes in the sector.
According to a study by Irungu (2013), interest rate charged to borrowers rose to highs of
up to thirty percent and above in 2012 while interest rate earned by savers remained
relatively low. The banking sector in Kenya continued to register increasing profitability
while most sectors in the economy were stagnating or declining. The high profitability in
the sector was perceived to be increasing against a backdrop of decreasing access to credit
or credit uptake which was further stifling the growth of Kenya’s economy. This situation
resulted in increased debate by the public and members of parliament to control bank
interest rate charged by banks to borrowers. On the other hand, banks argued that control
of bank interest rates would ultimately lead to the collapse of the banking industry.

Members of Parliament passed a bill to amend the Banking Act in August 2016 which
imposed restrictions on the interest rates at which banks should offer loans setting a cap
on the lending rate and the rate at which banks can take deposits setting a floor on the
interest rate payable for deposits. The Amendment led to an interest rate lending cap of no
more than four percent above the Central Bank Rate (CBR) and a floor on the deposit rate
at no less than seventy percent of the Central Bank Rate. This was however not the first
attempt at controlling interest rates by law in Kenya. In 2001, there was an attempt to
amend the Central Bank of Kenya Act which proposed that the lending rates be capped at
four percent above the 91 day Treasury bill and deposit rates at four percent below the 91
day Treasury bill rate leading to a spread of eight percent.

4
In 2013, the Kenya Parliamentary Budget office proposed to benchmark the deposit rates
to the lending rates. In all these attempts, the restrictions were not successful (Gregoriou,
Hoppe, & Wehn, 2013). An analysis of the effect of the interest rate capping law is
critical to understanding on whether or not the desired impact of the law such as increase
financial access and lower cost of credit are being achieved and the overall effect on
financial intermediation role of the banks in the greater economic context. The variables
considered in this study were bank profitability, credit uptake and non-performing loans.

1.2 Statement of the Problem

Commercial banks are the dominant players in the financial services sector in Kenya. It
therefore follows that any failure in the sector is likely to have adverse impact on the
economy of the country. Failure as witnessed in 2016 of banks such as Imperial Bank and
Chase Bank can lead to bank runs that can lead to financial crisis and economic
meltdown. Although the banking sector has generally been profitable in the last 3
decades, there are banks that have still recorded losses (Oloo, 2011). In addition, failure
in the financial services system as seen during the events unfolding after the sub-prime
crisis in the United States also motivated this study on performance of banks in Kenya
and the effects that regulation such as control of interest rate can have on the same.

Bank interest rates in Kenya have been varying and largely open to market forces of
demand and supply. The Banking Amendment Act 2001 is one of the major
developments that took place in the industry in attempts to regulate the interest rate
regime in the country. Since then developments have taken place in regulation including
adoption of Bank Base Lending Rates as reference rates. Banks in Kenya and especially
foreign banks lent on Treasury-Bill pegged reference rates and in the period immediately
prior to the interest rate capping law banks lent based on Kenya Bankers’ Reference Rate
(KBRR) which was an average of the 91-Day Treasury Bill Rate and the Central Bank
Rate reviewed and advised by the Monetary Policy Committee (MPC) every 6 months in
January and July of every year.

It is important to understand the effect of regulation of interest rates on the performance

of banks. Robinson (2010) established in his study that bank earnings are affected by
unanticipated changes in lending interest rates. The impact of interest rates on the
performance of commercial banks has been a concern of policy makers and bankers for a

5
long time. Matu (2006) argued that poor performance of commercial banks led to
increased pressure on banks to maintain high lending rates in attempts to minimize losses
associated with bad or non-performing loans. On the other hand, low credit uptake was
directly attributed to the high lending rates.

Locally, studies that have been done on effect of interest rate on bank performance
include Ngari (2013) who found a positive linear relationship between interest rate
spreads and ROA. Kipngetich (2011) also conducted a study which established that high
financial performance of banks is predominantly determined by the interest rates charged.
Whereas the above studies provide insights on the effect of interest rate on financial
performance, they only provided information on interest rates from a broad perspective
and did not cover the effect that regulation and laws capping interest rates can have on the
banking sector and the role of banks in their intermediation role. This study sought to
understand whether the effects desired with the coming into effect of the interest rate
capping law such as increased credit uptake are being achieved. The study also aimed at
assessing the effect of the law on bank profitability and key performance indicators such
as on portfolio of non-performing loans. The study was therefore aimed at investigating
the effect of interest rate capping on the performance of banks in Kenya and focused on a
case study of the largest bank in East Africa and the Kenyan banking industry by assets
KCB Kenya Limited.

KCB Bank Kenya Limited is a wholly owned subsidiary of KCB Group (Kenya
Commercial Bank Limited) which is a holding company. Other banks within the Group
include subsidiaries in Uganda, Rwanda, Tanzania, Rwanda, Burundi and South Sudan.
KCB Bank started in 1896 in Zanzibar as a branch of National Bank of India. The bank
extended its headquarters to Nairobi which had become the headquarters of the expanding
railway line to Uganda in 1904. Grindlays Bank merged with the National Bank of India
to form the National and Grindlays Bank. In 1970, the Government of Kenya acquired
majority shareholding and changed the name to Kenya Commercial Bank. The
Government later sold 20% of its shares at NSE through an IPO that saw 120,000 new
shareholders acquire the bank. In 1997, the bank resolved to spread its operations to
various viable markets in the region starting with Tanzania and later Uganda, Rwanda,
South Sudan and Burundi. In pursuit of its vision, the bank rebranded itself to KCB Bank
Limited with a broad reaching internal and external program. In 2011 and in its 115 th year

6
of operations, the bank posted a profit of KES 15.1 Billion to become the most profitable
bank in Eastern Africa – a position which it has held to date. KCB Group Plc has grown
to become the region’s largest banking institution with an asset base of KES 595 Billion
(USD 5.84 Billion) and a market capitalization of KES 105 Billion (USD 1.02B) and
broad regional distribution in 7 countries with over 265 branches, 13,562 agents and 962
ATMs.

1.3 Purpose of the Study

This study was exploratory in nature and its main purpose was to investigate the effect of
interest rate capping on three operating performance indicators of commercial banks in
Kenya with KCB Bank – Kenya Ltd selected for a case study.

1.4 Research Objectives

The research objectives of the study were to;

1.4.1 Investigate the effect of interest rate capping on credit uptake performance of
commercial banks in Kenya.

1.4.2 Find out the effect of interest rate capping on profitability of commercial banks in
Kenya.

1.4.3 Investigate the effect of interest rate capping on the portfolio of non-performing
loans on commercial banks in Kenya.

1.5 Importance of the Study

1.5.1 Banks
The study was aimed at providing banks with a better understanding of the effects of
interest rate capping on operating performance. From the outcome of this study, banks are
expected to influence matters of regulation with policy makers, institute policy changes
and strategies to adopt in order to cope with the likely effects of interest capping on their
operating performance.

1.5.2 Researchers
The research provided a better understanding of interest rate capping and how it affects
the operating performance of banks. Out of this study, researchers are expected to be in a
position to evaluate the need to investigate correlation if any between capping of interest

7
rates and related macroeconomic factors of inflation and foreign exchange rates, increase
in informal lending, financial inclusion and to formulate policies that can be adopted by
governments to cope with negative effects if any of rate capping laws.

1.5.3 Business People.

This study enabled business people to get a clear insight and establish if indeed interest
rate capping law has led to the desired increase in access to credit and therefore growth of
their businesses.

1.5.4 Kenyan Government

This study was very important to the Kenyan government evaluate the effects of the
interest rate capping law. The Kenyan Government was expected to be in a position to
evaluate whether interest rate capping is having the desired effect on the growth of the
economy from the projected benefit of assumed increase in credit access. Out of this
study, the government should be in a position to take stock of positive and negative
effects on the economy and specifically whether it is aiding in stifling or spurring
economic growth.

1.6 Scope of the Study

This was a case study of one commercial bank in Kenya – KCB Bank Kenya Limited.
This study was limited to examine the effect of interest rate capping on the operating
performance of commercial banks. Specifically, the study established the effects of
capping of interest rate on lending or credit uptake, effect of interest rate capping on bank
profitability and on portfolio of non-performing loans. The study was conducted in the
year 2017.

1.7 Definition of Terms

1.7.1 Interest Rate Capping
Capped interest rate is an interest rate that is allowed to fluctuate, but which cannot
surpass a stated interest cap (Maimbo, Henriquez, & World Bank Group, 2014).

1.7.2 Interest rate

8
The proportion of a loan that is charged as interest to the borrower, typically expressed as
an annual percentage of the loan outstanding (Andersen & Piterbarg, 2010).

1.7.3 Bank
A bank is a financial institution that accepts deposits from the public and extends credit to
borrowers (Armentrout, Learning, & Armentrout, 2013).

1.7.4 Inflation
An increase in prices of products and services and fall in the purchasing power of money
(Cumes, 2014).

1.7.5 Non-Performing Loans

A loan for which the principal and interest are not paid for a period of 90 days (Aliag,
2010).

1.7.6 Profitability
This is a company’s ability to earn a reasonable profit on the owner’s investment (Buffet,
2005)

1.7.7 Credit Uptake

This refers to the rate at which credit requests to a bank are received, approved and
utilized by borrowers.

9
1.8 Chapter Summary
The chapter detailed the background of the study, established the research gaps on the
effect of capping of interest rate on lending or credit uptake, effect of interest rate capping
on bank profitability and the change in portfolio of non-performing loans. The
introduction and background of the study started by reviewing the role of banks as a
financial intermediary to the economy including a brief discussion on this important role
and the negative effects that may arise out of failure in the financial services industry. The
problem statement outlined the role of interest rates in operating performance of banks
and the attempts that have been made in controlling and regulating interest rates in
Kenya. The scope of the study being KCB-K was also outlined with the objective of
investigating effect of interest rate capping on operating performance of banks
specifically setting the objectives of looking at effects on profitability, credit uptake and
non-performing loans.

10
 CHAPTER TWO
2.0 LITERATURE REVIEW

2.1 INTRODUCTION
This chapter reviews literature on the effects of interest rate capping on the operating
performance of banks. The literature review investigated the effect of capping of interest
rate on credit uptake, the effect of interest rate capping on bank profitability and the effect
of interest rate capping on the portfolio of non-performing loans.

2.2 Effect of Capping Of Interest Rate on Credit Uptake

A capped interest rate is an interest rate that is allowed to fluctuate, but which cannot
surpass a stated interest cap (Maimbo, Henriquez, & World Bank Group, 2014). Wild
(2012) defined interest rate cap as the limit on how upward the interest rate can increase
on an adjustable rate of mortgage or loan. Capped rates provide the borrower with a
hybrid of a fixed and variable rate loan (Cumes, 2014). The fixed element arises from the
cap while the variable part is due to the fact that the rate may increase or decrease while
taking into consideration other factors involved in pricing a loan facility such as risk
rating which is an indicator of a borrower`s probability of default (Tan & Floros, 2012).

Countries need to consider carefully which method of regulation works best in the context
of the institutions of the country, rather than simply copying a method from the developed
world. Parker and Kirkpatrick (2005) carried out a study in UK to examine alternative
methods of regulating prices and profits of privatized utilities in low‐income countries
with a view to identifying their strengths and weaknesses. The results of the study were
that the use of a price cap was much reduced in low‐income economies. This was because
of its information requirements, need for regulatory expertise and, more broadly, the
institutional endowment found in many low‐income countries.

McClain and Meier (2013) did a study in America to examine costs and benefits of cap
and trade, along with some examination of the actual mechanics by which the system is
expected to operate. They found out that the caps reduced profits of financial institutions
which affected the whole economy in terms of developments. In addition the capping law
hindered trade between America and other countries because the benefits were few
compared to the costs.

11
Credit Uptake is one of the key performance indicators used by banks in assessing
operational performance banks given the intermediary role of banks in facilitating transfer
of funds from savers to borrowers. This is the primary role of banks. It is therefore
important to consider the effect of interest rate regulation on credit uptake as an important
indicator of operating performance of banks. Allocation of loans and loan portfolio of a
company or any business are determined by the lending decisions. The factors which
influence bank lending decisions include the nature and size of loan portfolio of a
company. Size of company or organization hinders small businesses from accessing loans
since the banks also consider the geographical coverage. A study carried out in UK firms
showed that the smallest firms, whose lending decisions are made at local branches, faced
slightly higher borrowing costs, yet this was offset by the reduced likelihood of collateral
being requested (Cowling & Westhead, 1996). Factors influencing credit uptake affect
demand for loans. Commercial banks act as an intermediary between suppliers and
borrowers.

Business coverage influences the lending decisions. Businesses covering small areas face
a challenge when obtaining loans from banks (Tan & Floros, 2012). Large businesses
usually have greater access to credit compared to smaller businesses. A study of Indian
banks showed that bigger sized companies on average had easier and larger ticket size
loans compared to smaller sized firms or companies (Malhotra & Singh, 2007). Increase
in market share attracts more and more customers through provision of quality products.

Credit risk is most simply defined as the potential that a bank borrower or counterparty
will fail to meet its obligations in accordance with agreed terms. The goal of credit risk
management is to maximize a bank’s risk-adjusted rate of return by maintaining credit
risk exposure within acceptable parameters. Risk management is of importance for
emerging markets heavily dependent on foreign capital as it potentially allows banks to
improve risk management practices in terms of capital adequacy (Gubareva & Borges,
2016). Credit risk adversely affects the bank’s profitability especially where interest rates
are capped. In a regime of interest capping, banks are unable to charge unsecured loans at
a higher rate compared to the secured loans. Securitization of loans reduces banks
insolvency risk, increases profitability, provides liquidity and leads to greater supply of
loans (Primer on Securitization, 2016).

12
Banks obtain a lot of information about a borrower before issuing a loan. A process of
verification is carried out to reduce risk of default. Credit monitoring of entrepreneurs and
small business enterprises has grown rapidly over the past years and relationship lending
alone is not enough to reach optimal financing terms (Bauer & Esqueda, 2017). A
research carried out in Ugandan banks showed that there was correlation between
commercial bank lending terms, financial literacy and access to formal credit (Korutaro
Nkundabanyanga, Kasozi, Nalukenge, & Tauringana, 2014). Collateral and loan
repayment periods are not apparent variables for commercial bank lending terms but the
interest rates are very significant (Gubareva & Borges, 2016).

Credit risk is managed by banks through thorough checking of customer’s past credit
history. This is achieved by using local bureaus which have quick access to customer
information (Mallik & Bhar, 2011). A study in Ghana revealed that credit risk
management practices within listed banks in Ghana were in line with sound practices and
that the banks’ corporate governance framework provided for definition of acceptable
types of loans and maximum maturities for the various types of loans (Apanga, Appiah, &
Arthur, 2016).The listed banks in Ghana were exposed to credit risks associated with
granting both corporate and small business commercial loans and the use of collateral to
mitigate credit risk exposures (Gubareva & Borges, 2016). Credit terms must be very
clear to enable better understanding by both customers and banks.

Credit management systems differ from one central bank to another. A study of
Tanzanian banks revealed that credit risk management system of less developed
countries are different from developed countries and this implies that the environment
within which a bank operates is an important consideration for a credit risk management
system to be successful (Li & Ding, 2008). Lower interest rates are always favorable to
consumers as they are motivated to acquire more loans on account of low cost of credit.

Poor flow of information arises where there is no transparency. When banks lack
information about a customer’s credit worth, they are forced to raise interest rates on
loans to cover the risk (Gubareva & Borges, 2016). In an interest rate capping regime,
banks are unable to raise the interest rate above the stated rate and are therefore unable to
price loans to reflect variations in risk of default from one customer to another. Banks
rely on credit reference bureaus where they can get information about customers.

13
Interest rate caps can also lead to lack of transparency on loan terms. In South Africa,
lenders implemented extra fees and commissions on loans so as to respond to the interest
rate caps (Apanga, Appiah, & Arthur, 2016). Joran (2012) argued that transparency aids
in curtailing irregular and corrupt practices by banks in pricing of credit facilities. Joggar
and Greak (2007) did a research in South Africa and found that the companies that lacked
transparency were characterized by a high degree of corruption and in turn incurred heavy
financial losses. According to Murui (2007), transparency may not be achievable in all
situations and especially in those where a high degree of confidentiality is required. A
research done of UK banks by Gora (2011), established that lack of transparency
facilitated banks in keeping information that would otherwise be pivotal to decisions
made by the investors and general public about the banks. Lack of transparency hinders
shareholders of a company from accessing information that influences investment
decisions (Nurt & Garl, 2016). A study done in Nigerian manufacturing companies
revealed that, majority of shareholders withdrew from being part of the company due to
lack of transparency in the financial statement (Metik & Juel, 2014).

Banks loan disbursements decrease if interest rates are capped as banks demand more
qualifications to issue loans and the customers in turn tend to shy away from borrowing
(Gubareva & Borges, 2016). Increased selection and qualification criteria used by banks
while extending credit leads to a reduction in the number of loans issued. Reduction in the
amount of loans issued reduces bank profits because of the corresponding reduction in
interest income (Apanga, Appiah, & Arthur, 2016). This in turn encourages informal
lending where customers rush to other lending institutions that have fewer requirements
on selection and qualification criteria before granting access to credit.

A study in Arabia found that over the past two decades, institutions that made microloans
to low-income borrowers in developing and transition economies focused increasingly on
making their lending operations financially sustainable by charging interest rates that are
high enough to cover all their costs. They argued that doing so ensured the permanence
and expansion of the services they provided (Rosenberg, Gonzalez, & Narain, 2009).
Sustainable microfinance providers continue to serve their clients without the need of
ongoing infusions of subsidies and can fund exponential growth of services for new
clients by tapping commercial sources, including deposits from the public (Li & Ding,
2008).

14
Interest capping also discourages the supply of funds to the bank therefore encouraging
more informal lending. A research in China revealed that private firms which have
limited access to formal lending relied more on self-funds and they were limited by
financing choices. Informal financing and trade credit relieves the tension of cash flow
chain but cannot solve the financing constraints (Su & Sun, 2011). Informal lending is
important in promoting performance in manufacturing industry, while trade credit is more
effective in wholesale and trading industry.

Although various studies have been done on various effects of interest rates, there is little
if any on the effect of regulation on important bank performance indicators such as effects
of regulation of interest rates in credit uptake. One of this study’s main objectives was
therefore to investigate the effect of interest rate capping regulation on credit uptake as a
key performance matrix on operating performance of banks.

2.3 Effect of Interest Rate Capping On Bank Profitability

2.3.1 Bank Profitability – Net Interest Margins (NIMS)
Interest income is one of the main sources of revenues for banks. Regulation of interest
rates is invariably expected to have a direct effect on the interest income earned by the
bank. It is therefore important to understand the effect that regulation such as capping of
interest rate would have on the margins on interest income.

Profitability and financial performance is measured by return on assets which gives a

clear picture of how well the management uses company`s assets to generate profits (Rug,
2013). Interest rates affect profits of banks directly (Aren & Duhn, 2016). According to
Hurn and Farl (2007), interest rates affect bank profitability either directly or indirectly.
During low interest rate periods more people are motivated to borrow and banks benefit
more from increased interest earnings. Conversely, increased interest rates discourage
consumers from borrowing and this leads to reduced interest income generated and in
turn reduced profits of the bank (Teern & Regina, 2011).

When banks impose many requirements for customers to access loans, the demand
decreases and this lowers the amount of interest income earned. Implementation of
interest capping encourages more informal borrowing as customers opt for the more
easily accessible loans which ultimately have an effect on formal banking sector credit
demand and ultimately bank profitability (Rosenberg, Gonzalez, & Narain, 2009). Brian
Ngugi said that the Industrial and Commercial Development Corporation (ICDC)

15
announced a three-percentage point reduction in loan interest as it fought to retain a
competitive edge under the new rate capping era which forced banks cut charges in
Kenya (Industrial and Commercial Development Corporation (ICDC), 2016).

The other school of thought argued that interest capping slows down the flow of credit to
some specific sectors perceived to be riskier and increased transaction fees and
commissions are charged to compensate for the expected decreased earnings should be
expected (Osei‐Assibey & Bockarie, 2013). They further argued that there is a better way
of forcing banks to lower the lending rates such as encouraging more innovation,
increasing financial literacy, improving the credit information-sharing platform and
encouraging more public disclosures on bank interest rates. Due to interest capping, banks
are also less likely to offer unsecured loans to individuals or organizations.

For the banks to manage credit risk, they have to increase the risk premium that in turn
increases the lending rate (Apanga, Appiah, & Arthur, 2016). With interest rate capping,
banks are unable to increase the lending rate and this therefore exposes them to credit risk
and finally reduction of profits (Edris, 1997). Increased loan costs like commissions, to
cover the reduction of lending rates by banks make the loans more expensive and
discourage people from borrowing and saving (Rosenberg, Gonzalez, & Narain, 2009). A
case study of German banks argued that lending is a statistically significant determinant
of bank profits and this average effect masks important systematic differences among
banks (Ekpu & Paloni, 2016). Findings from the study carried out in Sierra Leone
indicated that risk premium, the share of non‐performing loans in the banks' loan
portfolio, leverage ratio and local currency deposit levels positively and significantly
affect the share of loan supply to the private sector in banks' earning assets (Osei‐Assibey
& Bockarie, 2013).

Implementation of interest rate capping forces banks to do thorough background checks

on customers before giving credit to them. This kind of selection discourages customers
from approaching the formal banking sector for credit. Research carried of banks in
Kuwait revealed that the true determinants of bank selection decisions made by business
customers were more likely to be a function of both the perceived importance of bank
attributes and the difference among banks in a given region with regard to each of these
attributes (Edris, 1997). Faizan (2016) carried out a study to investigate the impact of
financial reforms, financial liberalization and banking regulation and supervision policies

16
on net interest margins by using the Bank Scope database of 76 economies and found out
that financial reform had a negative and statistically significant impact on bank interest
margins.

Borrowers are forced to provide all the necessary information and not all the information
given may be correct. People are not always willing to provide the correct information
about their investments and therefore this expose the banks to credit risk and default risk.
This adverse selection occurs if the banks try to protect themselves from the risks
associated with lending (Apanga, Appiah, & Arthur, 2016). A research in German and
UK banks showed that the changes in the law and banking regulations reshaped both
German and UK banking institutions (Stevenson & Pond, 2016). German bank employees
were facing ever-increasing pressure as their employers strive to become efficient,
streamlining banks with a high orientation towards their shareholders in a highly
competitive market. The deregulation of German banks manifested in an adjustment of
institutional behavior, steering towards a shareholder orientation (Osei‐Assibey &
Bockarie, 2013).

Borrowers who hide information about their personal assets expose the bank to default
risk. Moral hazard arises when the terms and conditions between the lender and borrower
changes after entering into a contract (Ekpu & Paloni, 2016). This is as a result of
borrower not planning for future payments, unwilling to pay his or debts, or in case of
terminated employment. This increases volatility and default risk. A study carried out in
Japan indicated that banks were more diversified in the run-up to the crisis were
associated with higher default risk during the crisis and foreign shareholders prompted
banks to engage in higher risk-taking activities in pursuit of higher returns, putting banks
at a higher risk of default (Yeh, 2017).

Failure to honor payments to the bank exposes it to the risk of decreased profits, as the
interest income is not earned together with the principal amount. Increase in default risk,
forces banks to increase interest rates and therefore decreases volatility (Agrawal &
Maheshwari, 2014). With interest rate capping the banks are unable to increase the
interest rate meaning that the volatility is high and thus the default risk. There is always a
relationship between default risk and volatility. A research carried out in Turkey revealed
that there is significant relationship between volatility and the default state of the lending

17
contracts but fail to establish a connection between default states and stock returns or
relative liquidity of markets (Osken, Onay, & Unal, 2016).

Changes in stock market sensitivity greatly influence the probability of default (Yeh,
2017). Findings from the study carried in India found out that sensitivity to changes in the
stock market and sensitivity to changes in inflation have a significant impact on the
default probability of a firm and that Stock market sensitivity has a significant positive
relationship with the probability of default, and Consumer Price Index sensitivity has a
significant negative relationship with the probability of default (Agrawal & Maheshwari,
2014).

Interest rate capping force banks to close down due to competition from other banks and
informal lending institutions. Banks are forced to offer loans at low interest rates which
are unable to cover the loan costs (Osei‐Assibey & Bockarie, 2013). For the banks to
cover loan costs they have to add other costs like commissions, many requirements so as
to avoid default of loans (Edris, 1997). These additional costs make the borrowers to go
for the informal lending leading to reduced profits or losses. World Bank found out that
credit constraints reduce the profit margins of banks by 13.6% per year (Ngugiri, 2012).
In January 2017 the Managing director of Bank of Africa announced the closure of about
of about a third of its branches in Kenya, joining five other lenders on cost-cutting
measures that include staff cuts in only six months. Before, Bank of Africa had
announced layoffs and branch closures since August when the Government moved to
regulate interest rates on loans and savings (Lenders in turmoil as Bank of Africa shuts 12
branches : Kenya - The Standard, 2017).

Reduction of lending rates forces financial institutions to shut down as they are able
unable to operate and meet their operational costs. Since the cap law was introduced in
Kenya, banks have been trying to cut costs to increase their profits by digitalizing
operations and reducing wages (Osei‐Assibey & Bockarie, 2017). In December 2016,
National Bank of Kenya declared to retrench some employees and offer a good package
for early retirement and also Equity Bank announced that it will not be in a position to
hire more employees but rather it will invest in technology and agency banking. Sidian
Bank announced to reduce the number of employees by 108. Family Bank and first
community bank were faced by the challenge of reduced earnings and increased number

18
of bad loans. Ecobank operates in 36 countries and plans to reduce the branches in Kenya
having closed nine by to date ("Lenders in turmoil as Bank of Africa shuts 12 branches:
Kenya - The Standard, 2017).

Bank liquidity refers to the ability of the bank to ensure the availability of funds
to meet financial commitments or maturing obligations at a reasonable price at all
times(Olagunju, 2014) .Adequate liquidity enables a bank to meet three risks namely:
funding risk (the ability to replace net outflows of funds either through withdrawals of
retail deposits or non-renewal of wholesale funds), Time risk (the ability to compensate
for non receipt inflows of funds if the borrower fails to meet their commitment at a
specific time), lending risk (ability to meet requests for funds from important
customers).According to Dang (2011) adequate level of liquidity is positively related with
bank profitability.

External factors represent forces beyond the control of the bank. External factors
represent the general macroeconomic environment under which the commercial banks
operate. Herrero and Mathieu (2014) point out that deteriorating local economic
condition for instance low GDP, inflation, interest and exchange rate cause bank
failure. Further Hefferman (2011) asserts that macroeconomic factors are worsened by
regulations imposed on banks. Decline in GDP result in fall of income and asset
prices, leads to non-performing loans, lowers borrower’s financial capacity and
depresses the value of collaterals as secondary means of servicing debts (Wainaina,
2013). Demerguç-Kunt and Huizinga (2001), and Bikker and Van (2002) found a positive
correlation between bank profitability and the business cycle.

On the studies that have been done in investigating effect of interest rates on the
performance of banks, there are still research gaps on the effects that regulation and in
particular capping of interest rates has on the operating performance of banks. One of the
main objectives of this study was therefore to look specifically at effect of interest rate
capping on bank profitability.

19
2.4 Effects of Interest Capping On Non-Performing Loans
A non-performing loan is a loan that is in default. Loans become non-performing after the
borrower fails to pay for 90 days although this may vary depending on the contract terms
and conditions. A loan is non-performing when the interest and the principal amount are
not paid at least 90 days (Aliag, 2010). A research done at Ghana found out that risk
premium, the share of non‐performing loans in the banks' loan portfolio, leverage ratio
and local currency deposit levels positively and significantly affect the share of loan
supply to the private sector in banks' earning assets. On the other hand, advances to local
currency deposit ratio and bank size have significant negative effects on the share of loans
in banks assets (Osei‐Assibey & Augustine Bockarie, 2013).

In India non-performing loans are common in the agricultural sector whereby the farmers
are unable to pay the loan. The farmers face the challenges of floods or drought and this
makes them unable to pay back their loans. Non-performing loans are solved in two ways
which include centralization and decentralization. Centralization is whereby banks and
government come together to find a solution and this may include Asset Management
Company (Hurl, 2011). Decentralization involves the steps taken by the affected banks
(Raul, 2015). The banks are left alone to manage their own non-performing loans by
giving them incentives, legislative powers, or special accounting or fiscal advantages. The
best and common way of managing non-performing loans is the establishment of Asset
Management companies. Companies use public or bank funds to remove non-performing
loans from their books.

Many studies have been done concerning the macroeconomic factors which influence the
number of non-performing loans. According to Lusak (2011), macroeconomic factors
which influence non-performing loans initiate credit risk. Macro-economic factors
influencing non-performing loans include inflation, exchange rates, gross domestic
product, unemployment levels and real interest rates (In Islam & in Vos, 2015). Inflation
means that the prices of products and services are high. When inflation rates are high, the
stock prices of banks also increase (Osei‐Assibey & Bockarie, 2013). With the cap law in
effect the banks are not able to rise up the interest rates above the given rate.

Increase in economic activities of a country increases demand for loans and therefore
leading to high lending rates. Increased economic activities make projects profitable,
decrease default rates and increase deposits in banks. Gambacorta (2004) argued that the

20
changes in monetary policy can affect deposit and lending rates through the interest rate,
bank lending and bank capital channels. If the monetary policy increases lending rates, it
makes more difficult for the banks to get funds and in turn passes these costs to borrowers
through high lending rates. Higher lending rates reduce the borrowing power of
customers, they spend less and reduction in demand.

Current credit valuation systems are classified into the forward-looking mechanism,
which judges the borrowers’ credit levels based on their uploaded information, and the
backward-looking mechanism, which judges the borrowers’ credit levels based on their
historical repayment performance (Gao, Sun, & Zhou, 2017). The backward-looking
credit evaluation mechanism relies on the repeated borrowings and thus fails to explain
the default risk, and weakens the effectiveness of forward-looking credit indicators. A
study done at China to estimate the effectiveness of the credit evaluation system found
out that only the information reflecting borrowers’ credit ability can explain the default
risk on the platform under the forward-looking credit evaluation mechanism. Additional
information such as the interest rate and the repayment periods reveals borrowers’ credit
and thus can also be used as a predictor of borrowers’ default risk.

Regulation of financial institutions is a series of cyclical interactions between opposing

political and economic forces (Unda & Margret, 2015).High capital adequacy ratio and
prudent provisioning policy reduces the level of non-performing loans (Hussain, 2012).
All regulatory devices do not significantly reduce non-performing loans for countries
with weak institutions, corrupt environment, and little democracy. Non-performing loans
can be reduced by strengthening the legal system and increasing transparency and
democracy, rather than focusing on regulatory and supervisory issues (Boudriga, Boulila
Taktak, & Jellouli, 2009).

Issuance of loans is one of the most important activities carried out by banks as the
interest rates generate cash flows (Remy, 2007). Interest rate is the portion of loan
charged as interest to the borrower (Collins & Wanjau, 2007). Total cost of a loan
includes the principal amount and interest amount agreed during loan application process
(Caporale, 2010). According to Boulila (2009), when there is no interest capping, banks
are flexible to charge higher risk premium and therefore cover default risk. Low lending
interest rates decrease the number of non-performing loans as the borrowers are able to

21
pay. On the other hand, high lending rates make the loans unaffordable to the borrowers
and the probability of default is increased.

Interest rate spread is the difference between the average yield a financial institution
receives from loans and other interest-accruing activities and the average rate it pays on
deposits and borrowings (Mattingly, Harrast, & Olsen, 2009). A study done at South
African banks found out that, interest rate spread affects the performance of banks` assets
by increasing loan costs charged (Tan & Lee, 2015). In Kenya the interest rate spread is
usually high for long-term loans therefore limiting many people from accessing loans and
therefore leading to non-performing loans. Interest rate spreads are determined decreased
savings, insufficient loans, low competition in the banking industry, low profits or losses
made, uncertainty of macro environment and the challenges facing the banking system
(Hou, 2012). Liang-Liang Xie (2008) argued that interest rate spread highly contributes to
non-performing banks and therefore affecting bank profitability.

Size of bank is measured in terms of geographical coverage, assets and profitability.

Alhisa (2010) argued that there is a negative relationship between non-performing loans
and the size of the bank. Buelk (2007) did a research in Ugandan banks and found out that
there was an inverse relationship between non-performing loans and size of the bank. The
inverse relationship means that large banks have better risk management systems that
reduce the number of non-performing loans compared to the smaller banks. Lucy (2010)
revealed that big banks in terms of capital ratio and market power had fewer numbers of
non-performing loans.

The size of the bank is negatively related to non-performing loans (Aral & Weill, 2007).
Aktan and Masood (2009) suggest that smaller banks adopt small business loan
underwriting practices that are riskier than those of larger banks, riskier in that small
banks prefer to lend to small firms that lack hard financial data to support the lending
decision and riskier to the extent that the failure rates of small businesses are higher than
those of larger, established firms. Caporale and Gil-Alana (2010) reveal that rapid credit
expansion, bank size, capital ratio and market power explain variation in non-performing
loans. Rajiv and Dhal (2003) utilize panel regression analysis established that cost and
terms of credit, banks size influence NPLs. Nakayiza (2002) found a negative relation
between bank size and non-performing loans and argue that bigger size allows for more
diversification opportunities.

22
Non-performing loans increase if cost efficiency is low indicating that there is poor loan
underwriting, monitoring and controls. There is a positive correlation between cost
efficiency and non-performing loans. A study done at UK banks revealed that low
underwriting of loans led to the increase of non-performing loans and affected profits
negatively (Sari et al., 2010). Nael (2014) revealed that banks with low quality loans are
cost efficient than the ones with high quality loans. Karani and Huel (2008) examined the
relationship between banks cost efficient and non-performing loans in China banks and
established that there was high negative correlation. On the other hand, Darl and Faurl
(2013) established that low cost efficiency was associated with a likelihood of increase in
the number of non-performing loans in future which was associated with poor
management and lack of credit skills.

Low cost efficiency is a signal of poor management practices, thus implying that as a
result of poor loan underwriting, monitoring and control, NPLs are likely to increase. Hou
(2012) found a direct link between loan quality and cost efficiency. Inaba, Kozu and
Sekine (2008) posit that there exists a trade-off between allocating resources for
underwriting and monitoring loans and measured cost efficiency. Banks which devote
less effort to ensure higher loan quality are more cost-efficient; however, there is a
corresponding burgeoning number of NPLs in the long run.

Watanabe and Sakuragawa (2008) examined empirically the relation between cost
efficiency and non-performing loans and concluded a high negative significant
correlation. On the other hand, Vogiazas and Nikolaidou (2011) established that low cost
efficiency is positively associated with increases in future non-performing loans and links
this to ‘bad’ management with poor skills in credit scoring, appraisal of pledged
collaterals and monitoring borrowers. Hawtrey, K., & Liang, (2008) found a is strong
evidence in favor of the bad management proposition and propose that regulatory
authorities in emerging economies should focus on managerial performance in order to
enhance the stability of the financial system by reducing non-performing loans.

Risky projects lead to high borrowing cost for borrowers which increase NPL levels.
Lending money is perhaps the most important of all banking activities, for the interest
charged on loans is how the banks earn cash flows. Interest rate is the price a borrower
pays for the use of money they borrow from a lender/financial institutions or fee paid on
borrowed assets (Collins & Wanjau, 2011). It measures the price at which borrowers of

23
funds are willing to pay to the owners of capital while at the same time measures the price
at which lenders are willing to lend their money to enterprise in exchange for
consumption. Cost of loan includes the principal repayments and interest rates are agreed
at the time of the loan application (Caporale & Gil-Alana, 2010).According to Boudriga,
Boulila and Jellouli (2009), when there is no ceilings on lending rates, it is easier for
banks to charge a higher risk premium and therefore give loans to more people.

2.5 Chapter Summary

Chapter two reviewed literature on the three specific objectives namely; the effect of
capping of interest rate on credit uptake, the effect of interest rate capping on bank
profitability and the effect on portfolio of non-performing loans. Literature looked at each
specific objective in detail and reviewed regulation of interest rates in other parts of the
world including both positive and negative effects of interest rate regulation on trade.
Literature reviewed also looked at what previous researchers have established on effect of
interest rates in bank lending criteria, credit uptake and performance of loan portfolio.

24
 CHAPTER THREE
3.0 RESEARCH METHODOLOGY

3.1 INTRODUCTION
Research methodology used in the study is discussed in this chapter. It entailed the
research design, population and sampling design, data collection methods, research
procedures and data analysis methods used in the study. The chapter ended with a
summary.

3.2 Research Design

Research design is an overall strategy chosen to integrate the different components of the
study in a coherent and logical way, thereby, ensuring effective address of the research
problem (Frampton & Ingersoll, 2000). This study adopted the use of descriptive case
research design. The case study approach was preferred by the researcher due to time
constrain and also on the availability and reliability of data from the bank – KCB Bank
Kenya Ltd. In addition, the researcher works within the bank chosen for the study which
made it easier to collect data from the respondents. This descriptive case research was
aimed at getting detailed information regarding the effects that the interest rate capping
law has had on the performance of commercial banks with the expectation that the effects
on one bank are likely to be replicated in other banks operating within the same industry.

Descriptive research design method was also chosen because it enabled the researcher to
infer the findings to a larger population with high level of accuracy. Descriptive research
design was used in this study to explain in detail the effect of capping of interest rate on
credit uptake, the effect of interest rate capping on bank profitability and the effect of
interest rate capping on non-performing loans portfolio. The study used qualitative
approach in order to gain a better understanding and more insightful interpretation of the
results. According to Coopers and Schindler (2004) descriptive studies are more
formalized and typically structured with investigative questions.

Descriptive studies are used to collect information that describes characteristics of a

population, event or situation (Sekaran & Bougie, 2009). In this study descriptive
research design was chosen to help know about the required characteristics of the
population, to establish well the aspects of the study, draw conclusions and make
recommendations based on the findings of the study. A survey was conducted using
questionnaires administered to staff of the bank in both the front line sales functions

25
(Corporate Relationship Managers, SME Relationship Managers, Mortgage Relationship
Managers and Business Bankers) as well as the back end functions (Credit Analysts,
Credit Approvers and Debt collectors) with the idea being to collect views from different
functions within the bank and to aid in arriving at conclusions that would be
representative of the bank which can then be tested at industry level. The study was
directed by three variables which include the effect of capping of interest rate on credit
uptake, the effect of interest rate capping on bank profitability the effect of interest rate
capping on portfolio of non-performing loans.

3.3 Population and Sampling Design

3.3.1 Population
Target population consists of all members of a real or hypothetical set of people, events or
objects from which a researcher wishes to generalize the results of their research while
accessible population consists of all the individuals who realistically could be included in
the sample (Borg & Gall, 2007). The target population of the study was KCB Bank
Kenya Limited branches in Nairobi based on branch location to target both high end and
low income earners and the Head Office in both front line sales function and back end
credit operations functions.

3.3.2 Sampling Design

3.3.2.1 Sampling Frame
Sampling frame is a set of source materials from which the sample is selected (Kothari,
2004). The definition also encompasses the purpose of sampling frames, which is to
provide a means for choosing the particular members of the target population that are to
be interviewed in the survey (Bailey, 2008). The sampling frame of this survey was KCB
Bank employees in the Corporate, Retail, Mortgage and Credit Divisions of the Bank.
The Corporate and Mortgage Divisions covered Relationship Managers while Retail
Division covered Branch staff from 5 branches in Nairobi and its environs and for the
Credit Division, Credit Analysts, Approvers and Debt Recovery staff based at the Head
Office.

3.3.2.2 Sampling Technique

Purposive Sampling technique was applied in this study and it involved collection of data
from selected employees (by role) in the business divisions (Corporate, Mortgage, SME
and Retail) and Credit Divisions of the bank.

26
 3.3.2.3 Sample Size
Kombo and Tromp (2009) assert that a sample is a subset of a population that has been
selected to reflect or represent characteristics of a population. The study adopted a census
survey design. Census survey was adopted because the population of interest was small.

Respondent Number

Personal Banker 10

Business Banker 10

SME relationship Manager 10

Mortgage Relationship Manager 5

Corporate Relationship Manager 5

Branch Manager 10

Credit Analyst 10

TOTAL 60

3.4 Data Collection Method

Mugenda and Mugenda (2003) acknowledge that there are two types of data: primary and
secondary data. Primary data refers to information which is gathered from the field,
whereas secondary data refers to information obtained from articles, published works and
casual interviews. Primary data was used for this study. The data was collected by the use
of 5-point type Likert scale in appendix B. The questionnaires were self-administered to
Corporate, SME and Mortgage Relationship Managers, Branch Managers, Credit
Analysts and Approvers. The questionnaire had four sections: demographic information,
effects of interest rate capping on credit uptake, effects of interest rate capping on bank
profitability and effects of interest rate capping on portfolio on non-performing loans.

The researcher dropped and picked the questionnaires after they were been filled in by
the respondents. Before actual data collection, pilot testing was done on KCB bank
employees. The pilot data was not included in the actual study since it was for pre-testing
of the research instrument. Pre-testing the questionnaire usually grants the researcher the
chance to refine it by revealing any omissions in the questions, sequence and design and

27
also observe how the questionnaire performs under the actual study (Churchill &
Iacobucci, 2012).

3.5 Research Procedures

The researcher obtained authority from KCB bank to collect data from Corporate,
Mortgage, Retail and Credit Divisions from Branch, Sales Managers, Relationship
Managers and Credit Analysts and Approvers reviewing Retail - Individual, Micro, Small
& Medium Enterprises (SME) and Corporate Applications. A pilot study was conducted
using a sample of ten respondents by selecting randomly from the sampling frame. The
Pilot study was used to identify any errors and ambiguities in the questionnaire. Results
from the pilot were used to correct and clear any ambiguities in the questionnaire before
the start of the main data collection. Questionnaires were self-administered to the
employees selected for the study with the Researcher being available to provide
clarification where the same was required. The questionnaire had an introduction advising
respondents that the study was for academic use only and that confidentiality would be
observed.

3.6 Data Analysis Methods

Data analysis is a practice in which raw data is ordered and organized so that useful
information can be extracted from it (Gall et al, 2007). Descriptive statistics such as,
mean and frequencies was used in data analysis. The mean scores were used to measure
the significance of the variables in the study.

Data collected through questionnaires and financial statements, was prepared in readiness
for analysis by editing, handling blank responses, coding, categorizing and keying into
statistical package for social sciences (SPSS) computer software. SPSS was used to
produce frequencies, descriptive and inferential statistics which was used to derive
conclusions and generalizations regarding the population. The descriptive statistics
adopted for the study were frequencies and percentages.

28
3.7 Chapter Summary
Research methodology used in the study has been described in this chapter. Descriptive
research design was used in this study. The chapter has described in details the research
design, population and sampling design, data collection methods, research procedures and
data analysis methods. Chapter four discusses results and findings of the study while
chapter five makes conclusions and recommendations for further studies.

29
 CHAPTER FOUR
4.0 RESULTS AND FINDINGS
4.1 INTRODUCTION
This chapter presents the results and findings based on the three specific objectives. The
objectives of this study were to investigate the effects of interest rate capping on bank
profitability the portfolio of non-performing loans. The first part demographic
information, the second part analyzes the effect of capping of interest rate on credit
uptake, the third part the effect of interest rate capping on bank profitability and the fourth
section the effect of interest rate capping on the portfolio of non-performing loans.

4.2 Demographic Information

The demographic data in the study included the study include the position in the bank and
years worked in the bank.
4.2.1 Response Rate
Table 4. 1Response rate
Population Returned questionnaires Response rate
60 50 83.33%

The study conducted a census survey with a sample size being Head Office staff and staff
from selected branches in Nairobi. Sixty questionnaires were administered. Fifty
questionnaires were returned representing 83.3% which is a considered a fairly good
response rate for the sample selected.

4.2.2 Reliability
The researcher conducted a pilot study to test for reliability of the data collection
instrument. The reliability of the data collection instrument is required before the
instrument can be used to collect data for analysis. 10 questionnaires were used to collect
the pilot data analysis.

Table 4. 2 Reliability
Variables Number Of Items Cronbach Alpha Status
Credit uptake 10 0.789 Accepted
Bank Profitability 7 0.826 Accepted
Non-performing loans 8 0.789 Accepted

30
To test for reliability, the study adopted the Cronbach Alpha statistics. The data collection
instrument for a variable is said to be reliable if the Cronbach Alpha statistic for the items
used to measure the variable is above 0.7. The Cronbach Alpha statistics for all the
variables were found to be above 0.7 as shown in table 4.1.
4.2.3 Years Worked in the Bank

Figure 4. 1 Years Worked In the Bank

From Figure 4.1 above shows that 5 respondents had worked in the bank for less than two
years, 13 respondents for three to five years, 27 respondents for five to ten years and 5
repondents for over ten years.
4.2.4 Position in the Bank

30%
24%
25%
20% 18% 18%
16%
14%
15%
10% 8%

5% 2%
0%
Personal Business SME Mortgage Corporate Branch Credit
banker Banker Relationship Relationship Relationship Manager Analyst
Manager Manager Manager

Figure 4. 2 Position in the Bank

31
From figure 4.2 above, 18% of the respondents were personal bankers. 18% Business
Bankers, 14% SME Relationship Manager, 16% Mortgage Relationship Manager, 24%
Corporate Relationship Manager, 2% Branch Manager and 8% Credit Analyst.

4.3 Effect of Capping Of Interest Rate on Credit Uptake

Table 4. 3 Bank had many borrowers before the capping of interest rates
Frequency Percent Valid Cumulative
Percent Percent
Valid Strongly disagree 2 4.0 4.0 4.0
Disagree 13 26.0 26.0 30.0
Neutral 2 4.0 4.0 34.0
Agree 24 48.0 48.0 82.0
Strongly Agree 9 18.0 18.0 100.0
Total 50 100.0 100.0

The researcher wanted to know if there was a correlation between the number of
borrowers before and after the interest rate cap law came into effect. Out of the fifty
respondents, 4% strongly disagreed, 26% disagreed, 4% were not sure, 48% agreed and
18% strongly agreed that the bank had many borrowers before the capping of interest
rates. Correlation table shows that there is a negative correlation of -0.09 between the
number of new borrowers and intense selection applied in banks.

32
Figure 4. 3The number of approved loans have increased since the law came into
effect
The inference on this parameter is that a reduction and capping of interest rates is
expected increase the number of interested applicants from the resulting affordability of
the facility and the increased number of loan applications should in turn increase the
number of loans approved. The study found out that 4% strongly disagreed, 48%
disagreed, 18% were neutral, 26% agreed and 4% strongly agreed that the number of
approved loans increased since the law came into effect. The correlation table in
appendix C shows that there is a positive correlation of 0.514 between the number of
approved loans and the number of increased new borrowers since the law came into
effect.
Table 4.4 Number of new borrowers has increased since the law came into effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 5 10.0 10.0 10.0
Disagree 15 30.0 30.0 40.0
Neutral 9 18.0 18.0 58.0
Agree 15 30.0 30.0 88.0
Strongly Agree 6 12.0 12.0 100.0
Total 50 100.0 100.0

The study intended to test whether the interest rate capping affected the number of new
borrowers. It was discovered that 10% strongly disagreed, 30% disagreed, 18% were
neutral, 30% agreed and 12% strongly agreed that the number of new borrowers increased
since the law came into effect. Correlation table in appendix C shows that there is a
positive correlation of 0.514 between the number of new borrowers and the number of
approved loans.

33
Table 4. 5 The selection criteria for new loans has increased since the law came into
effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Disagree 4 8.0 8.0 8.0
Neutral 7 14.0 14.0 22.0
Agree 22 44.0 44.0 66.0
Strongly Agree 17 34.0 34.0 100.0
Total 50 100.0 100.0

Selection criteria matters a lot for banks when issuing loans so as to avoid default and
credit risk. From the study, 8% disagreed, 14% were neutral, 44% agreed and 17%
strongly agreed that the selection criteria for new loans increased since interest rate
capping came into effect here in Kenya. Correlation table in appendix C reveals that there
is a positive correlation of 0.551 between the selection criteria and the intense selection in
banks.

Table 4. 6 Interest Rate Capping Law has aided in increasing financial inclusion
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 4 8.0 8.0 8.0
Disagree 16 32.0 32.0 40.0
Neutral 7 14.0 14.0 54.0
Agree 12 24.0 24.0 78.0
Strongly Agree 11 22.0 22.0 100.0

Total 50 100.0 100.0

Every financial institution aims at providing affordable financial services to low income
earners. One of the key objectives of the interest rate capping law was to increase
financial inclusion by enhancing affordability and therefore access to credit. The
researcher found out that 8% strongly disagreed, 30% disagreed, 14% were neutral, 24%

34
agreed and 22% strongly agreed that interest rate capping law helped increase the
financial inclusion in Kenya. Correlation tables in appendix C shows that there is a
negative correlation of -1.46 between financial inclusion and the number of approved
loans since the law came into effect.

Table 4. 7 Informal Lending has increased since the law came into effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 1 2.0 2.0 2.0
Disagree 11 22.0 22.0 24.0
Neutral 11 22.0 22.0 46.0
Agree 19 38.0 38.0 84.0
Strongly Agree 8 16.0 16.0 100.0
Total 50 100.0 100.0

The researcher sought to find out if there was a relationship between the coming into
effect of the rate cap law and increase in informal lending. It is expected that if the formal
banking institutions tightened their credit policies due to the law, borrowers would seek to
borrow from informal lenders The researcher wanted to know if the interest rate capping
encouraged informal lending and discovered that 2% strongly disagreed, 22% disagreed,
38% agreed and 16% strongly agreed. Correlation table in appendix C reveals that there
was a positive relationship between informal lending and slow growth of lending
activities (r=0.482).

35
Figure 4. 4 The bank’s liquidity has improved since the interest rate cap law came
into effect
The interest rate cap law had an effect on both the interest rate charged to borrowers
which capped the maximum rate of interest banks can charge for borrowing at 14% and
the minimum interest paid to depositors at a floor of 7%. The researcher sought to
understand if the law had led to improvement in the bank’s liquidity and therefore
availability of funds to on-lend to borrowers. Figure 4.4 shows that 26% strongly
disagreed, 18% disagreed, 20% were neutral, 44% agreed and 16% strongly agreed that
the bank liquidity improved since the rate interest rate capping law came into effect.
Correlation Table in appendix C shows that there was a positive correlation between the
improved banks liquidity and the increased financial inclusion (r=0.322).

Table 4. 8 Bank has slowed down on lending since the law came into effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 3 6.0 6.0 6.0
Disagree 6 12.0 12.0 18.0
Neutral 6 12.0 12.0 30.0
Agree 26 52.0 52.0 82.0
Strongly Agree 9 18.0 18.0 100.0
Total 50 100.0 100.0

Banks are expected to slow down in lending if both the interest income and the return on
the risk from lending is low. Unsecured loan disbursements are expected to reduce or to
be completely done away with where there is little or inadequate return on the risk taken
from the loan pricing. Selection and approval criteria is also expected to be more stringent
usually slow in lending if the interest income is slow, the loans are insecure or if there are
strict government regulations. The study was aimed at knowing if the implementation of
interest rate capping slowed down the lending of banks. The researcher found that 3
respondents strongly disagreed, 6 agreed, 6 were neutral, 26 (52%) agreed and 9 strongly
agreed. Correlation table in appendix C shows that there was a negative correlation
between slowed down on lending and the number of approved loans (r= -0.346).

36
4. 9 Selection criteria for new loans is now more strict since the law came into effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Disagree 5 10.0 10.0 10.0
Neutral 2 4.0 4.0 14.0
Agree 17 34.0 34.0 48.0
Strongly Agree 26 52.0 52.0 100.0
Total 50 100.0 100.0

Selection criteria for loans differ from one bank to the other. From the study it was found
out that 5 disagreed, 2 were neutral, 17 agreed and 26 strongly agreed that the selection
criteria for loans became stricter after the interest rate capping law came into effect.
Correlation table in appendix C shows that there was a negative correlation of 0.704
between selection criteria and slowed down on lending.

Table 4.10 Interest Capping Forces Banks to Have Intense Selection during Lending
Frequenc Valid Cumulative
y Percent Percent Percent
Valid Strongly
2 4.0 4.0 4.0
disagree
Disagree 1 2.0 2.0 6.0
Neutral 1 2.0 2.0 8.0
Agree 16 32.0 32.0 40.0
Strongly Agree 30 60.0 60.0 100.0
Total 50 100.0 100.0

Banks always practice intense selection during lending to safeguard themselves against
the risk of default. Banks will ordinarily charge a higher interest rate for higher risk loans.
The study revealed that 4% strongly disagreed, 2% disagreed, 2% neutral, 32% agreed
and 60% strongly agreed that interest rate capping forced the banks to have intense
selection during lending of loans. Correlation table in appendix C shows that there was a

37
positive relationship between intense selection during lending and strict selection for new
loans (r=0.547).

4.4 Effect of Interest Rate Capping On Bank Profitability

Table 4. 11 Interest income has increased since the law came into effect.
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 13 26.0 26.0 26.0
Disagree 24 48.0 48.0 74.0
Neutral 7 14.0 14.0 88.0
Agree 6 12.0 12.0 100.0
Total 50 100.0 100.0

Banks lend with the objective of increasing income from interest income and which
ultimately increase profitability the banks’ profits. The study aimed at establishing
whether the interest rate capping law increased the interest income. The results were that
26% strongly disagreed, 48% disagreed, 14% were not sure and 12% agreed that the
interest rate income increased since the law came into effect. Correlation table in
appendix D shows that there was a positive relationship between interest income and
increase in bank profitability (r=0.722).

38
Figure 4. 5 Capping of interest rates has led to an increase in bank profitability
Banks aim to continuously increase their profitability. The researcher wanted to know if
the interest rate capping law had facilitated increased bank profitability. It was found out
that 12% agreed, 2% neutral, 62% disagreed and 24% strongly disagreed that capping of
interest rates led to an increase in bank profitability.

Table 4. 12 Loan loss provisions have reduced since the law came into effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 4 8.0 8.0 8.0
Disagree 20 40.0 40.0 48.0
Neutral 12 24.0 24.0 72.0
Agree 14 28.0 28.0 100.0
Total 50 100.0 100.0

Loan provisions is the amount set aside as an allowance for default loans and loan
payments. The researcher found out that 8% strongly disagreed, 40% disagreed, 24%
neutral and 28% agreed that loan loss provisions reduced since the law came into effect.
Correlation table in appendix D shows that there was a positive relationship between loan
loss provisions and bank marketability (r=0.209).

Table 4. 13 The default rate has increased since the law came into effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 2 4.0 4.0 4.0
Disagree 22 44.0 44.0 48.0
Neutral 14 28.0 28.0 76.0
Agree 10 20.0 20.0 96.0
Strongly Agree 2 4.0 4.0 100.0
Total 50 100.0 100.0

39
Loan default arises whereby the borrower fails to pay the outstanding loan amount or
becomes unable to pay due to unemployment or disability. From the study it was
discovered that the 4% strongly disagreed, 44% disagreed, 28% neutral, 20% agreed and
4 % strongly agreed that the default rate increased since the interest rate capping law
came into effect. Correlation table in appendix D shows that there was a positive
correlation between default rate and reduction in liquidity (r=0.398).

Figure 4. 6 Other bank charges have increased since the law came into effect

It is expected that if interest rates are low, banks are likely to increase other charges so as
to compensate the loss resulting from reduction in interest income. Figure 4.6 shows that
2% strongly disagreed, 14% disagreed, 64% agreed and 20% strongly agreed that other
bank charges increased since the interest rate capping law came into effect. There was a
negative relationship between increased bank charges and increase in bank profitability as
shown in correlation table at appendix D (r=-0.287).

40
Table 4. 14 Interest rate capping has led to reduction in liquidity/funds available for
lending
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 3 6.0 6.0 6.0
Disagree 18 36.0 36.0 42.0
Neutral 4 8.0 8.0 50.0
Agree 12 24.0 24.0 74.0
Strongly Agree 13 26.0 26.0 100.0
Total 50 100.0 100.0

Funds available for lending are very important for banks to ensure that they can issue any
amount of loan to create more interest income. Table 4.16 shows that 6% strongly
disagreed, 36% disagreed, 8% neutral, 24% agreed and 26% strongly agreed that interest
rate capping led to reduction in liquidity or funds available for lending. There was a
positive correlation between reduction in liquidity and the default rate (r=0.398).

Table 4. 15 Capping of interest rates and marketability of the bank

Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 1 2.0 2.0 2.0
Disagree 5 10.0 10.0 12.0
Neutral 8 16.0 16.0 28.0
Agree 30 60.0 60.0 88.0
Strongly Agree 6 12.0 12.0 100.0
Total 50 100.0 100.0
Banks work harder each and every day to ensure that their products are competitive in the
market. The researcher wanted to know if interest rate capping increased marketability of
the bank. It was found out that 2% strongly disagreed, 10% disagreed, 16 % were not
sure, 60% agreed and 12% strongly agreed that capping of interest rates increased
marketability of the bank. Correlation table in appendix D shows that there was a positive
relationship between bank marketability and reduced loan provisions of 0.209.

41
4.5 Effect of Interest Rate Capping On the Portfolio of Non-Performing Loans

Table 4. 16 Number of non-performing loans has increased since the law came into
effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 2 4.0 4.0 4.0
Disagree 25 50.0 50.0 54.0
Neutral 10 20.0 20.0 74.0
Agree 11 22.0 22.0 96.0
Strongly Agree 2 4.0 4.0 100.0
Total 50 100.0 100.0

Non-performing loans are loans for which borrowers are in arrears or have completely not
serviced payment on facilities for a period of 90 or more days or as per loan contract
terms. The researcher sought to establish whether there was any correlation between an
increase or decrease in portfolio of non-performing loans and the coming into effect of
the interest rate cap law. Table 4.20 shows that 4% strongly disagreed, 50% disagreed,
20% neutral, 22% agreed and 4% strongly disagreed that the number of non-performing
loans increased since the interest rate capping law came into effect. Correlation table in
appendix D shows that there was a positive relationship between number of non-
performing loans and loan loss provisions (r=0.571).

Table 4.17 Recoveries on non-performing loans after the law came into effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 1 2.0 2.0 2.0
Disagree 12 24.0 24.0 26.0
Neutral 18 36.0 36.0 62.0
Agree 15 30.0 30.0 92.0
Strongly Agree 4 8.0 8.0 100.0
Total 50 100.0 100.0

42
Table 4.21 shows that 1 respondent strongly disagreed, 12 disagreed, 18 were neutral, 15
agreed and 4 strongly agreed that recoveries on non-performing loans increased since the
law came into effect. Correlation table in appendix E reveals that there was a negative
relationship between recoveries of non-performing loans and time spent in managing non-
performing loans since the law came into effect (r=-0.50).

Figure 4. 7 Loan loss provisions have greatly increased since the rate cap law came
into effect
The researcher wanted to know if loan loss provisions had greatly increased since the rate
cap law came into effect. It was discovered that 4% strongly disagreed, 48% disagreed,
16% were neutral, 26% agreed and 6% strongly agreed that the Loan loss provisions
greatly increased since the rate cap law came into effect. Correlation table in appendix E
shows that there was a positive relationship between loan loss provisions and the number
of non-performing loans since the law came into effect (r=0.571).

43
Table4.18 Proposals and requests to restructure credit facilities have increased since
the law came into effect
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly disagree 2 4.0 4.0 4.0
Disagree 6 12.0 12.0 16.0
Neutral 7 14.0 14.0 30.0
Agree 28 56.0 56.0 86.0
Strongly Agree 7 14.0 14.0 100.0
Total 50 100.0 100.0

It is estimated that capping of interest rates should lead to decreased supply of credit and
therefore money in the economy that should in turn reduce level of spending by
consumers and businesses which ultimately affects business revenues and loan repayment
ability leading to default and increase in requests to the bank to restructure debt facilities.
4% of the respondents strongly disagreed, 12% disagreed, 14% neutral, 56% agreed and
14% strongly agreed that proposals and requests to restructure credit facilities have
increased since the law came into effect. There was a positive relationship of 0.311
between proposals and requests to restructure credit facilities and time spent in managing
non-performing loans since the law came into effect. Correlation table in appendix E
shows that there was a positive relationship between proposals and slowed growth rate of
loans in the bank (r=0.404).

44
Table 4. 19 There has been increased time spent in managing non-performing loans
since the law came into effect.
Cumulative
Frequency Percent Valid Percent Percent
Valid Strongly
2 4.0 4.0 4.0
disagree
Disagree 19 38.0 38.0 42.0
Neutral 12 24.0 24.0 66.0
Agree 14 28.0 28.0 94.0
Strongly Agree 3 6.0 6.0 100.0
Total 50 100.0 100.0

A lot time can be spent on the management of non-performing loans to avoid making
losses. Table 4.23 shows that 4% strongly disagreed, 38% disagreed, 24% neutral, 28%
agreed and 6% strongly agreed that time spent in managing non-performing loans
increased since the law came into effect. There was a positive relationship between time
spent in the management on non-performing loans and the number of non-performing
loans since the law came into effect in the correlation table in appendix E (r=0.479).

Table 4. 20 Interest rate capping and recovery of non-performing loans

Valid Cumulative
Frequency Percent Percent Percent
Valid Disagree 13 26.0 26.0 26.0
Neutral 14 28.0 28.0 54.0
Agree 18 36.0 36.0 90.0
Strongly
5 10.0 10.0 100.0
Agree
Total 50 100.0 100.0

Table 4.24 shows that 26% disagreed, 28% neutral, 36% agreed and 10% strongly agreed
that Interest rate capping enabled recovery of non-performing loans. Correlation table in

45
appendix E revealed that there was a positive correlation between recovery of non-
performing loans and growth rate of loans in banks (r=0.325).

Figure 4. 8 Non-performing loans have slowed the growth rate of loans in the bank
It is a fact that non-performing loans slow the growth rate of loans in the banks. The
researcher wanted to know if it’s true. It was discovered that 5 disagreed, 5 neutral, 25
agreed and 15 agreed that Non-performing loans have slowed the growth rate of loans in
the bank. Correlation table in appendix E shows that there was a positive correlation
between growth rate of loans in banks and proposals and requests to restructure credit
facilities (r=0.404).

Table 4. 21 Non-performing loans and bank`s ability of making profits.

Frequenc Valid Cumulative
y Percent Percent Percent
Valid Disagree 2 4.0 4.0 4.0
Neutral 3 6.0 6.0 10.0
Agree 14 28.0 28.0 38.0
Strongly
31 62.0 62.0 100.0
Agree
Total 50 100.0 100.0

46
Making profits is one of the bank objectives and goals. From the study it was established
that 2 disagreed, 3 neutral, 14 agreed and 31 strongly agreed that non-performing loans
hinders the banks’ ability of making profits. There was a positive relationship between
bank`s ability to make profits and slow growth rate of loans in the bank (r=0.401).

Table 4. 22 Summary of means and standard deviation of the responses

Mean Std. N
Deviation
The bank had many borrowers before the capping of interest rates 3.50 1.182 50
The number of approved loans have increased since the law came 2.78 1.016 50
into effect
The number of new borrowers has increased since the law came 3.04 1.228 50
into effect
The selection criteria for new loans has increased since the law 4.04 .903 50
came into effect
Has the interest rate capping law helped increase financial 3.20 1.325 50
inclusion?
Has the informal lending increased since the law came into effect? 3.44 1.072 50
The bank’s liquidity has improved since the interest rate cap law 3.54 1.034 50
came into effect
Has the bank slowed down on lending since the law came into 3.64 1.102 50
effect
The selection criteria for new loans is now more strict since the 4.28 .948 50
law came into effect
Interest capping forces banks to have intense selection during 4.42 .950 50
lending
Interest income has increased since the law came into effect. 2.12 .940 50
Capping of interest rates has led to an increase in bank profitability 2.02 .869 50
Loan loss provisions have reduced since the law came into effect 2.72 .970 50
The default rate has increased since the law came into effect 2.76 .960 50
Other bank charges have increased since the law came into effect 3.86 .969 50
Interest rate capping has led to reduction in liquidity/funds 3.28 1.356 50
available for lending

47
Capping of interest rates has increased marketability of the bank 3.70 .886 50
The number of non-performing loans has increased since the law 2.72 .991 50
came into effect
There has been increased recoveries on non-performing loans since 3.18 .962 50
the law came into effect
Loan loss provisions have greatly increased since the rate cap law 2.82 1.063 50
came into effect
Proposals and requests to restructure credit facilities have increased 3.64 1.005 50
since the law came into effect
There has been increased time spent in managing non-performing 2.94 1.038 50
loans since the law came into effect
Interest rate capping has enabled recovery of non-performing loans 3.30 .974 50
Non-performing loans have slowed the growth rate of loans in the 4.00 .904 50
bank
Non-performing loans hinders the bank`s ability of making profits. 4.48 .789 50
Credit Uptake .7176 .09576 50
Non- Performing Loans .6770 .10677 50
Bank Profitability .5846 .08507 50

For credit uptake, the mean score was found to be 71.76% with a standard deviation of
9.576%. A mean score greater than 50% implying that for all the 10 items used, the
respondents on average believe that interest rate capping have an effect on credit uptake.
In terms of bank profitability, the conclusion was based on the analysis of the perception
that the respondents had on the questions asked regarding the effect of interest rate
capping on bank profitability. The scores from each of the 7 items used in this objective
were aggregated to total scores and thus the mean score from the 50 respondents. The
mean score was found to be 58.46% and standard deviation of 8.507% which was more
than 50% implying that interest rate capping affects the bank profitability.

In reference to non-performing loans, the conclusion was based on the perception that the
respondents had on the questions asked regarding the effect of interest rate capping on
non-performing loans. The mean score was found to be 67.70% with a standard deviation
of 10.677%. A mean score greater than 50% implies that for all the 8 items combined, the

48
respondents on average believe that interest rate capping have an effect on non-
performing loans. Table 4.22 shows the test on the significant difference between the
mean 67.70% and 50% at 0.05 significant levels.
4.6 Inferential statistics
The study sought to establish the relationship between the dependent variable (credit
uptake, bank profitability and portfolio of non-performing loans) and the independent
variable (interest rate capping).

4.6.1 Correlation
Table 4. 23 Correlation Analysis

Non-performing
Credit uptake Profitability loans
Credit uptake Pearson Correlation 1 .134 .138
Sig. (2-tailed) .353 .338
N 50 50 50
Profitability Pearson Correlation .134 1 .342*
Sig. (2-tailed) .353 .015
N 50 50 50
Non-performing loans Pearson Correlation .138 .342* 1
Sig. (2-tailed) .338 .015
N 50 50 50
*. Correlation is significant at the 0.05 level (2-tailed).

A correlation analysis was done to establish the relationship between the variables and the
study found out that there was a positive relationship between credit uptake and bank
profitability (r= 0.134, p= 0.353). The study also established that there was a positive
correlation of 0.342 between bank profitability and portfolio of non-performing loans
(p=0.15). The study revealed another positive relationship between non-performing loans
and credit uptake (r=0.138, p=0.338) as shown in Table 4.23.

49
4.6 Chapter Summary
The main objective of the study was to establish the effects of interest rate capping on the
performance of banks in Kenya. On the effects of interest rate capping on credit uptake,
the researcher established that 48% of the respondents agreed that there were many
borrowers before the law came into effect. Regarding the number of loan applications,
48% of the respondents were of the view that the number of approved loans had not
increased since the law came into effect despite the effective reduction in interest rates
that came with the law. The researcher also deduced that the selection criteria of new
loans increased after the implementation of interest rate capping where 44% of the
respondents strongly agreed with this assertion. At the same time 38% of the respondents
agreed that the capping of interest rate led to increase in informal lending.

In terms of effects of interest rate capping on bank profitability 62% of the respondents
concurred that the bank’s profits did not increase following implementation of the law. In
addition, the respondents established that loan loss provisions did not reduce since the law
came into effect and this was presented by 40% of the respondents. The default rate of
loans didn’t reduce since the law came into effect as 22 out of 50 respondents disagreed.
A majority of the respondents (64%) were in agreement that other bank charges (non-
interest charges) had increased after the law came into effect. The findings of the study
established that interest rate capping increased the marketability of the bank and this was
presented by 30 respondents who agreed.

On the effect of capping of interest rate on the portfolio of non-performing loans, the
researcher found that proposals and requests to restructure credit facilities had increased
since the law came into effect with 56% of the respondents being in agreement. 38% of
the respondents are of the view that additional time has not been spent in managing non-
performing loans. 26% of the respondents disagreed that Interest rate capping enabled
recovery of non-performing loans.

50
 CHAPTER FIVE

5.0 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction
This chapter highlights summary of the study, interpretation of the findings, conclusions
and recommendations based findings and results in chapter four.

5.2 Summary
The main objective of the study was to establish the effects of interest rate capping on the
performance of commercial banks in Kenya with a case study of KCB Bank Kenya
Limited.
The specific objectives of the study were:
i. To investigate the effect of interest rate capping on credit uptake
ii. To investigate the effect of interest rate capping on bank profitability
iii. To investigate the effect of interest rate capping on the portfolio of non-
performing loans
The study adopted descriptive research design. The target population was the employees
of KCB bank headquarters and branches located in Nairobi. The study sample comprised
of 60 employees of KCB bank and primary data was collected using questionnaires. Both
Excel and SPSS were used for data analysis and presented in form of graphs, pie-charts
and frequency tables.

On the effects of interest rate capping on credit uptake, it was established that the rate
capping law had led to a decrease in the number of new borrowers, a reduction in number
of newly approved loans, an increase in the selection criteria of new loans, increase in
informal lending and slow growth of credit uptake. However, the study established that
interest rate capping increases financial inclusion and improves the bank`s liquidity.

Regarding the effect of interest rate capping on bank profitability, the study established
that interest rate capping had led to a decrease interest income and overall decrease in
bank profitability. The study also established that loan loss provisions and other bank
charges also increased. It was however noted that interest rate capping had led to an
increase in marketability of the bank in form of number of applicants approaching the
bank seeking credit facilities. The study also noted a simultaneous increase in the default
rate on loans with the interest rate capping law.

51
On the effects of interest rate capping on portfolio of non-performing loans, the study
established that there was an increase in the number of non-performing loans, increased
recoveries on non-performing loans and increase in loan loss provisions. The study also
established that proposals and requests to restructure credit facilities increased since the
law came into effect. The findings also show that additional time was spent on the
management of non-performing loans and recovery of non-performing loans decreased
since the law was implemented.

5.3 Discussion

5.3.1 Effects of Interest Rate Capping On Credit Uptake

From the study it was established that the bank had many borrowers before interest rate
capping. 24 of the 50 respondents (48%) agreed and 13 (26% disagreed). The law also
resulted in a decrease in the number of approved loans. These findings support the
argument by Neil (2015) that interest rate capping reduces the number of new borrowers
due to strict regulations by both regulators and the bank. The study also established that
interest rate capping increases the selection criteria.

Aliam (2016) did empirical studies and established that interest rate capping leads to
enhancement of selection criteria in loans to avoid default and credit risk. Loan selection
involves an appraisal process that may involve several stages in which a customer is
assessed on eligibility for the loan requested. Salaried persons should meet all the
specified requirements by bank and SMEs are required to provide historical financial
statements including income statements for at least the past one year of trading. The
interest rate capping law leads to an increase in selection criteria in determining customer
eligibility for borrowing. Before the interest rate capping law banks were able to
compensate risk of default through higher loan pricing for higher risk borrowers. The
interest rate cap which prescribes the maximum interest rate chargeable for any loan does
not provide for pricing different customers based on their assessed likelihood of default.
Banks are therefore forced to tighten lending to customers that are perceived to have a
higher risk of default which leads to a reduction in the number of approved loans and
therefore credit uptake.

Financial institutions try to make their financial services affordable so that they can
attract more customers and therefore improve their interest income. From the study

52
findings, it was discovered that interest rate capping had not directly translated to increase
in financial inclusion. The study also established that other bank charges increased with
the interest rate cap law coming into effect. This finding supports arguments by Jane and
Meiul (2014), who found that interest rate caps leads to banks increasing other bank
charges as they seek to have insurance for the lost income through low interest rates. The
study also found correlation between increase in informal lending and interest rate caps as
people seek alternative access to credit having been denied access to credit through
formal lending institutions. According to Mughal and Freda (2015), banks lend to fewer
borrowers and majorities are locked out forcing them to opt for informal lending. The
study revealed that interest rate capping improved the bank`s liquidity with 44% of the
respondents agreeing.

A study by Scholz, Rochdi and Schaefers, (2015) revealed that asset liquidity is a relevant
pricing factor which contributes to good returns in financial institutions and a good
investment strategy exploiting differences in the underlying asset liquidity yields
considerable average excess returns of up to 8.04 per cent p.a. In the case of Kenya, the
interest rate cap law set a minimum rate of 70% of the Central Bank Rate as the minimum
rate payable on deposits placed with banks which led to improved liquidity in the bank as
more depositors were attracted to the interest rates which were on average higher than
before.

Further findings revealed that the bank slowed down on lending where 52% of the
respondents agreed and 18% strongly agreed. This finding supports the argument by Gao
(2012) that interest rate charges greatly affects the lending systems in banks leading to
low interest income. Apanga, Appiah and Arthur (2016) stated that reduction in the
amount of loans issued reduces bank profits because of the corresponding reduction in
interest income. Hunnes (2012) was however of a contrary opinion that interest rate caps
lead to increased lending by banks because the rates are low and customers who can
afford are many. The findings of the study also showed that selection criteria for new
loans increased since the law came into effect with 52% of the respondents agreeing. This
is in agreement with the research carried out by Edris (1997) and found out that the true
determinants of bank selection decisions made by business customers were more likely to
be a function of both the perceived importance of bank attributes and the difference
among banks in a given region with regard to each of these attributes. The mean for the

53
credit uptake was found to be 71.76% with a standard deviation of 9.576% meaning that
interest rate capping had effects on credit uptake.

5.3.2 Effects of Interest Rate Capping On Bank Profitability

Interest rate capping can either increase or decrease the bank’s profits. It is therefore
critical for the government to consider the effects of the law on both banks and
consumers. The researcher sought to establish if interest income had increased since the
law came into effect and the findings showed that 48% disagreed. According to Hurn and
Farl (2007), interest rates affect bank profitability either directly or indirectly. The study
established that bank profitability had not increased since the law came into effect with
62% agreeing. Banks are not likely to offer unsecured loans to individuals and
organization and this leads to reduction in profits. This is inconsistent with the argument
by Osei‐Assibey and Bockari (2013) who argued that there is a better way of forcing
banks to lower the lending rates such as encouraging more innovation, increasing
financial literacy, improving the credit information-sharing platform and encouraging
more public disclosures on bank interest rates.

Due to interest capping, banks are also less likely to offer unsecured loans to individuals
or organizations. Default arises when customers are unable to meet loan payment
obligations as they fall due. The study established that interest rate capping had coincided
with an increase in the rate of default. The root cause of this can be traced back to the
effect that an overall decrease in supply of credit having an effect on supply of money and
therefore overall spending and consumption on which businesses are directly dependent
for revenue. With a decrease in supply of credit and therefore spending, business
revenues fall and this has a direct effect on revenues and cash flows that are required to
meet loan obligations.

The study also established that loan loss provisions had increased with the coming into
effect of the rate cap law. Actech (2012) discovered that loan loss provisions in UK banks
continued to increase as borrowers were unable to pay loans due to increased bank
charges. Rosenberg, Gonzalez and Narain (2009) established that increased loan costs
like commissions to cover the reduction of lending rates by banks makes loans more
expensive and discourages people from borrowing and saving. Agrawal and Maheshwari,
(2014) argued that increase in default risk, forces banks to increase interest rates. With
interest rate capping the banks are unable to raise the interest rate to compensate for risk

54
on unsecured loans which leads to decreased profitability as a result of reduced volume of
loan sales.

The findings of the study showed that other bank charges increased since the law came
into effect. Apanga, Appiah, and Arthur (2016) argued that South African lenders
implemented extra fees and commissions on loans as a response to interest rate caps to
compensate for lost income as a result of rate capping. The study also established that
interest rate capping increased the amount of funds available for lending. This is because
the lending rate is low due to strict selection criteria as only few customers can meet the
loan requirements and at the same time due to the effect of the law on the interest rate
payable to depositors which requires that minimum interest payable on deposits be at
least 70% of the prevailing Central Bank Rate. Li and Ding argued that microfinance
providers continued to serve their clients without the need of ongoing infusions of
subsidies and fund exponential growth of services for new clients by tapping commercial
sources, including deposits from the public because their regulations were not strict
compared to the banks.

Marketability of the bank is important as it presents opportunities for increased revenues

from the wider customer reach. The researcher sought to establish whether the interest
rate capping law had resulted in increased ease of selling the bank’s financial services.
Rosebelle and Fidelia argued that interest rate capping provides information to customers
on the maximum interest rates that banks can apply for lending and as borrowers seek this
information, the visibility and marketability of the bank is increased in the process. This
is in contrast with the study done by Buley (2015) which found that interest rate capping
decreases marketability of financial institutions due to increased bank charges which
encourage informal lending. Mean for the bank profitability was found to be 58.46% wth
a standard deviation of 10.677% implying that interest rate capping had an effect on bank
profitability as the mean was above 50%.

5.3.3 Effects of Interest Rate Capping On Portfolio of Non-Performing Loans

An increase in portfolio of non-performing loans has a direct effect on bank profitability
as banks make provisions for bad and doubtful loan accounts which are charged to the
bank’s income statements as loan loss provisions and where recovery is considered
unlikely, bad loans have to be written off. The study revealed that although the interest
rate capping law had resulted in an increase in recoveries for loans that were non-

55
performing, there was a simultaneous increase in the number of new non-performing
loans which had increased since the interest rate capping law came into effect. In the
study majority agreed that the number of non-performing loans did not increase. Liang-
Liang Xie (2008) argued that interest rate spread highly contributes to non-performing
loans and in turn has a direct effect on bank profitability. Carlos (2015) discovered that
interest rate capping doesn’t affect non-performing by great impact due to intense
selection imposed during lending.

Banks put a lot of effort and resources to ensure that non-performing loans are quickly
recovered and that any loan loss provisions are written back to the bank’s income
statement. Giovanni (2017) did a research in Italy to establish the effect of default risk
and transaction costs on investors’ asset allocation and found that transactions costs
contributed to an increased number of non-performing loans in banks. From the study it
was established that loan loss provisions greatly reduced with 48% of the respondents
being in agreement. These findings are supported by Ronald (2015) who argued that
interest rate capping prevents issuance of unsecured loans which prevents the likely
occurrence of non-performing loans.

Time wasted on management of non-performing loans is costly. The researcher sought to

establish whether man hours spent in management of loans had increased since the law
came into effect. From the study 38% disagreed that there has been increased time on the
management of non-performing loans. A study by Fual (2012) established that Ugandan
banks spent a lot of time on loan selection than on management of non-performing loans
and this greatly increased their interest income. Proper selection of the customers to
whom loans are issued ensures that there is reduction in number of non-performing loans.
The study found out that interest rate capping enabled the recovery of non-performing
loans with 36% of the respondents agreeing. Cucinelli (2016) argued that the high level of
non-performing loans has an impact on the bank’s lending activity and the banks should
clean-up their credit portfolios as soon as possible.

Non-performing loans slow down bank growth. From the study it was discovered that
non-performing loans slow down the banks growth with 25 out of 50 respondents
agreeing. Mauryn (2013) supports these findings where she argued that interest rate
capping reduces profits due to increase in non-performing loans which do not create
income for the banks. The researcher also wanted to know if interest rate capping hinders

56
the bank`s ability to make profit. The findings of the study established that 62% strongly
agreed and 4% disagreed that interest rate capping hindered the bank’s ability to make
profits. Teern and Regina (2011) argued that high bank charges and interest rates
discourage consumers from borrowing and this leads to reduced interest income
generated and in turn reduced profits of the bank. Mean for the non-performing loans was
found to be 67.7% with a standard deviation 0f 8.507% meaning that interest rate capping
had an impact on the non-performing loans.

5.4 Conclusion

5.4.1 Effects of interest rate capping on credit uptake

The study established various negative effects of interest rate capping on credit uptake
namely: decreased number of borrowers, reduced number of approved loans, increased
selection criteria for new loans, low financial inclusion, increased informal lending and
slow lending of loans. The positive effect of interest rate capping on credit uptake in the
study was improved bank`s liquidity. Any law implemented by the government should be
of benefit to the organizations or institutions concerned. From the study it can be
concluded that interest rate capping did not lead to increased credit uptake despite the
lower and controlled cost of credit even through this was among the key considerations
made and effects desired when the law came into effect. In this regard, a review of the
rate cap law is considered necessary to evaluate the effects it is having on lending
including and the wider ramifications to the economy.

5.4.2 Effects of interest rate capping on profitability

Interest rate capping has a direct effect on bank profitability. Direct effects include
reduced interest income from the reduction in net interest margin that is a direct result of
both decrease in margin chargeable on borrowing, decrease in volume of loans approved
leading to direct reduction in revenue and increased loan loss provisions from the
correlated increase in non-performing loans. In this regard therefore, interest rate capping
has a negative effect on bank financial performance. The reduction in revenue from the
reduced Net Interest Margins (NIMs) and the overall decrease in interest income
ultimately lead to a need for cost reduction. Costs include operational and staff costs. A
reduction in staff costs has the direct effect of job losses which in turn has wider
ramifications for businesses including small and medium enterprises and the greater
economy. This then brings into question whether the objectives intended with the rate

57
capping in the first place which include provide cheaper access to credit in a bid to spur
economic growth are achieved or that in fact the reverse is true – that an interest rate cap
has not directly translated into increase in number of borrowers and volume of loans
disbursed.

5.4.3 Effects of interest rate capping on portfolio of non-performing loans.

This study discovered that interest rate capping increased recoveries from loans that were
already non-performing prior to capping of interest rates while at the same time it led to
an increase in the number of new non-performing loans and therefore an increase in the
amount of time spent on management of non-performing loans. Further, it was also noted
that there was an increase in the number of requests to restructure credit facilities. The
findings from the study are interesting in the seemingly conflicting manner of the effect
on the portfolio of non-performing loans.

An increase in recoveries of prior non-performing loans can be attributed to the fact that
there are likely to have been loans that were non-performing as a result of the higher
interest rate and that the rate capping which was also accompanied by an effective
reduction in rate led to increased affordability for the borrowers who were struggling to
meet their loan obligations in the prior high interest rate period. This is particularly true in
the case of individual borrowers who approached banks soon after the rate cap law came
into effect to increase borrowing while at the same time offering reprieve for borrowers
who were unable to meet loan obligations at the higher interest rates before.

On the other hand, the simultaneous increase in the number of non-performing loans can
be attributed to an overall decline in the number of newly approved loans and declined
requests for bank loan facility enhancements to businesses particularly small and medium
enterprises as more stringent lending criteria started soon after the rate cap law came into
effect. The result of the reduced credit from the tight lending criteria as the bank reduced
appetite on lending particularly to small and medium enterprises had an overall effect on
supply of money which affects the value chain with an overall decreased level of
spending that has a direct effect on revenues for businesses. With a reduction in revenues,
business cash flows and therefore ability to service existing loan obligations was
compromised leading to the surge noted in form of increasing number of non-performing
loans and requests from customers mainly SMEs and Corporate customers to restructure

58
existing credit facilities. It can be concluded that while the interest rate cap law provided
relief for borrowers who were unable to meet their loan obligations while the interest
rates were higher, at the same time due to the simultaneous tightening of lending criteria
for new and additional facilities, the supply of money had reduced which directly led to a
negative effect on business revenues and cash flows.

The findings from the study imply that while there was an improvement in the portfolio
of existing non-performing loans with increased recoveries. This is however likely to be
short term and further, that there is evidence to support the view that the longer term
negative effects on businesses could lead to an increase in the portfolio of non-performing
loans of banks leading to increased loan loss provisions and losses for banks.

5.5 Recommendations for Practice and Further Studies

5.5.1 Recommendations for Practice

5.5.1.1 Effects of Interest Rate Capping On Credit Uptake

The interest rate cap law was crafted with the intention of curtailing high interest rates
charged by banks which were considered to be leading to reduced access to credit that is
necessary for spurring economic growth. The findings of this study show that the
objective of the law from the lending perspective may not have necessarily been achieved
since the number of newly approved loans did not increase with the coming into effect of
the law. The findings of the study show that there was a decline in the number of newly
approved loans and therefore credit uptake even though there may have been an increase
in the number of credit requests. This is because banks tightened the lending criteria given
that they were no longer able to compensate risk of default by varying loan pricing to
match the risk assumed from one credit request to another. Policy makers therefore need
to reevaluate the effect of the interest rate capping law and consider the long term effect
that it could have on credit risk.

For further study, the researcher proposes that the scope of the study be extended to
include other banks including peer banks in the same tier as the bank of case study and
other second and third tier banks to investigate the effect that the interest rate capping law
will have had over a longer period of time on the credit uptake. The researcher further
proposes that a study should be undertaken to investigate the effect that the reduction in

59
the level of credit uptake is having on businesses particularly small and medium
enterprises, corporate and ultimately on the economy in order to advise policy makers on
the longer term effects of the interest rate capping law.

5.5.1.2 Effects of Interest Rate Capping On Profitability

Banks provide financial services to make profits. The findings from the study suggest that
there is evidence to confirm that the coming into effect of the interest rate cap law has had
a negative effect on bank profitability both from direct reduction in interest income,
compression of interest margins and increased costs in form of increased loan loss
provisions. Reduced bank profitability has a direct effect on cost-cutting measures that
can be adopted by banks as they seek to cope with the effects of the interest rate cap
amidst high overheads and operating costs. This ultimately leads to reduction in overhead
costs the highest being staff costs. The ultimate job losses are negative on the economy
and directly impact on the livelihoods of not only the job holder but also the families that
are dependent on the job holder. The researcher proposes that a study be undertaken to
investigate the effect of the interest rate cap law and actions taken by banks to cope with
direct effects of the law.

5.5.1.3 Effects of Interest Rate Capping On Portfolio of Non-Performing Loans

The study established that the interest rate capping law had an immediate positive effect
on the loans that were non-performing since it also came with a reduction in the cost of
credit which led to increase in recoveries of loans that would have otherwise gone bad.
However, at the same time, there was notable gradual increase in the portfolio of new
non-performing loans and number of requests to restructure existing loans. This increase
was attributed to a decrease in supply of credit and therefore money leading to reduced
revenues and cash flows to business that began to suffer the effects of the tightened credit
policy measures that were increasingly being adopted by banks.

The researcher proposes studies to be undertaken to evaluate the longer term effect of the
interest rate capping law on the portfolio of non-performing loans which should be further
assessed in different segments of the population including individual borrowers, SMEs
and larger corporate. An increase in portfolio of non-performing loans leads to increased
loan loss provisions and this can negatively affect the financial services industry with far
reaching negative effects on the economy.

60
5.5.2 Recommendations for Further Study
This study was focused on a case study of KCB Bank Kenya Limited due to the
limitations on time constraint. It is therefore recommended that a study covering
additional banks in the industry should be undertaken to better understand the effects of
interest rate capping on the banking industry and financial services which is key for the
economy. The researcher also proposes that a study needs to be undertaken to investigate
the long term effects that the law is having on macroeconomic factors of inflation and
exchange rates given that interest rates is one of the instruments that can be used to
regulate these factors which are critical to the well-being of the economy.

61
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APPENDICES
APPENDIX A: COVER LETTER

FELIX OKWANY
UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA
P.O BOX 14634-00800
NAIROBI

Dear Respondent,
I am a student at United States International University doing Masters of Business
Administration in Finance. Am carrying out a research on effects of interest rate capping
on the performance of commercial banks in Kenya a case study of KCB Bank. The study
is based on three specific objectives namely; effects of interest rate capping on credit
uptake, effects of interest rate capping on bank profitability and effects of interest rate
capping on portfolio of non-performing loans.

The target population will be KCB bank employees located in Nairobi County. This is an
academic research and therefore confidentiality will be highly observed. None of your
personal information will appear in the findings of the study. Thank you.

Yours faithfully,

Felix Okwany
Researcher

74
75
APPENDIX B: QUESTIONNAIRE
This questionnaire has statements regarding the effects of interest rate capping on
performance of banks a case study of KCB Bank Kenya. Kindly take few minutes to
complete the questionnaire as guided. Your responses will be handled with high degree of
confidentiality.
Thank you for agreeing to participate in this academic study.
SECTION A: GENERAL /DEMOGRAPHIC DATA

1. How many years have you worked in the bank?

a) Less than 2 years

b) 3 to 5 years
c) 5 to 10 years
d) Over 10 years
2. Kindly indicate your position in the bank
a) Personal Banker
b) Business Banker
c) Micro Business Banker
d) SME Relationship manager
e) Mortgage relationship Manager
f) Corporate Relationship Manager
g) Branch Manager
h) Credit Analyst
i) Others (specify) _________________________________

76
 SECTION B: EFFECT OF CAPPING OF INTEREST RATE ON CREDIT
UPTAKE
Please indicate the extent of your agreement or disagreement with the following
statements using the following Likert scale by ticking the box that best describes your
answer.
Strongly Strongly
No Statement Disagree Neutral Agree
disagree agree
1 Thebankhad many borrowers before the
capping of interest rates
2 The number of approved loans have
increased since the law came into effect
3 The number of new borrowers has
increased since the law came into effect
4 The requirements for new loans have
increased since the law came into effect
5 The interest rate capping law has increased
the number of customers accessing credit
6 More customers are turning to informal
lending since the law came into effect
7 The bank’s liquidity has improved since
the interest rate cap law came into effect
8 The bank has slowed down on lending
since the law came into effect
9 The selection criteria for new loans is now
more strict since the law came into effect
10 Interest capping forces banks to
have intense selection during lending

11. In what other ways does interest rate capping affect credit uptake?
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………

77
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………........................
........................
SECTION C EFFECT OF INTEREST RATE CAPPING ON BANK
PROFITABILITY
Please indicate the extent of your agreement or disagreement with the following
statements using the following Likert scale by ticking the box that best describes your
answer.

Strongly Strongly
No Statement Disagree Neutral Agree
disagree agree
1 Interest income has increased since the law
came into effect.
2 Capping of interest rates has led to an
increase in bank profitability
4 Loan loss provisions have reduced since
the law came into effect
5 The default rate has increased since the
law came into effect
6 Other bank charges have increased since
the law came into effect
7 Interest rate capping has led to reduction in
liquidity/funds available for lending
8 Capping of interest rates has increased
marketability of the bank

11. In what other ways does capping of interest rate affect bank profitability?
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………

78
 ………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………

SECTION D EFFECT OF INTEREST RATE CAPPING ON PORTFOLIO OF

NON-PERFORMING LOANSASK QUESTIONS RELATING TO INTEREST
RATE CAPPING ON PORTFOLIO OF NON-PERFORMING LOANS
Please indicate the extent of your agreement or disagreement with the following
statements using the following Likert scale by ticking the box that best describes your
answer.

Strongly Strongly
No Statement Disagree Neutral Agree
disagree agree
1 The number of non-performing loans has
increased since the law came into effect
2 There has been increased recoveries on
non-performing loans since the law came
into effect
3 Loan loss provisions have greatly
increased since the rate cap law came into
effect
4 Proposals and requests to restructure
credit facilities have increased since the
law came into effect
5 There has been increased time spent in
managing non-performing loans since the
law came into effect
6 Interest rate capping has enabled recovery
of non-performing loans
8 Non-performing loans have slowed the
growth rate of loans in the bank

79
9 Non-performing loans hinders the bank`s
ability of making profits.

11. In your opinion what other ways does capping of interest rates affect portfolio of non-
performing loans?
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
……………
Thank you for your participation

80
APPENDIX C: SPECIFIC OBJECTIVE ONE CORRELATION TABLE
Correlations c
T he T he
T he number select ion T he bank’s select ion Int erest
T he bank T he number of new crit eria for Has t he Has t he liquidit y has Has t he crit eria for capping
had many of approved borrowers new loans int erest rat e informal improved bank slowed new loans is forces banks
borrowers loans have has has capping law lending since t he down on now more t o have
before t he increased increased increased helped increased int erest rat e lending since st rict since int ense
capping of since t he law since t he law since t he law increase since t he law cap law t he law t he law select ion
int erest came int o came int o came int o financial came int o came int o came int o came int o during
rat es effect effect effect inclusion? effect ? effect effect effect lending

P earson
Correlat
Sig. (2- ion 1 .025 -.365 * * .038 -.195 .419 * * -.142 .188 .073 -.009
T he bank
t ailed) .861 .009 .792 .174 .002 .326 .191 .615 .950
had many
Sum of
borrowers
Squares and
before t he
Cross-
capping of
product s 68.500 1.500 -26.000 2.000 -15.000 26.000 -8.500 12.000 4.000 -.500
int erest
rat es Covariance 1.398 .031 -.531 .041 -.306 .531 -.173 .245 .082 -.010

P earson
Correlat ion .025 1 .514 * * -.146 .352 * -.209 .193 -.346 * -.189 -.368 * *
Sig. (2-
T he number
t ailed) .861 .000 .312 .012 .145 .179 .014 .189 .009
of approved
Sum of
loans have
Squares and
increased
Cross-
since t he law
product s 1.500 50.580 31.440 -6.560 23.200 -11.160 9.940 -18.960 -8.920 -17.380
came int o
effect Covariance .031 1.032 .642 -.134 .473 -.228 .203 -.387 -.182 -.355

P earson
Correlat ion -.365 * * .514 * * 1 -.020 .359 * -.091 .288 * -.230 -.062 -.155
T he number
Sig. (2-
of new
t ailed) .009 .000 .891 .011 .529 .043 .108 .667 .283
borrowers
Sum of
has
Squares and
increased
Cross-
since t he law
product s -26.000 31.440 73.920 -1.080 28.600 -5.880 17.920 -15.280 -3.560 -8.840
came int o
effect Covariance -.531 .642 1.509 -.022 .584 -.120 .366 -.312 -.073 -.180

P earson
T he
Correlat ion .038 -.146 -.020 1 -.126 .340 * .239 .425 * * .463 * * .551 * *
select ion
Sig. (2-
crit eria for
t ailed) .792 .312 .891 .382 .016 .095 .002 .001 .000
new loans
Sum of
has
Squares and
increased
Cross-
since t he law
product s 2.000 -6.560 -1.080 39.920 -7.400 16.120 10.920 20.720 19.440 23.160
came int o
effect Covariance .041 -.134 -.022 .815 -.151 .329 .223 .423 .397 .473

P earson
* * *
Correlat ion -.195 .352 .359 -.126 1 -.164 .322 -.061 .084 -.052
Sig. (2-
Has t he
t ailed) .174 .012 .011 .382 .256 .023 .671 .560 .720
int erest rat e
Sum of
capping law
Squares and
helped
Cross-
increase
product s -15.000 23.200 28.600 -7.400 86.000 -11.400 21.600 -4.400 5.200 -3.200
financial
inclusion? Covariance -.306 .473 .584 -.151 1.755 -.233 .441 -.090 .106 -.065

P earson
** * ** *
Correlat ion .419 -.209 -.091 .340 -.164 1 -.090 .482 .358 .356 *
Sig. (2-
Has t he
t ailed) .002 .145 .529 .016 .256 .535 .000 .011 .011
informal
Sum of
lending
Squares and
increased
Cross-
since t he law
product s 26.000 -11.160 -5.880 16.120 -11.400 56.320 -4.880 27.920 17.840 17.760
came int o
effect ? Covariance .531 -.228 -.120 .329 -.233 1.149 -.100 .570 .364 .362

P earson
Correlat ion -.142 .193 .288 * .239 .322 * -.090 1 .120 .259 .263
T he bank’s
Sig. (2-
liquidit y has
t ailed) .326 .179 .043 .095 .023 .535 .405 .070 .065
improved
Sum of
since t he
Squares and
int erest rat e
Cross-
cap law
product s -8.500 9.940 17.920 10.920 21.600 -4.880 52.420 6.720 12.440 12.660
came int o
effect Covariance -.173 .203 .366 .223 .441 -.100 1.070 .137 .254 .258

P earson
Correlat ion .188 -.346 * -.230 .425 * * -.061 .482 * * .120 1 .704 * * .459 * *
Sig. (2-
Has t he
t ailed) .191 .014 .108 .002 .671 .000 .405 .000 .001
bank slowed
Sum of
down on
Squares and
lending since
Cross-
t he law
product s 12.000 -18.960 -15.280 20.720 -4.400 27.920 6.720 59.520 36.040 23.560
came int o
effect Covariance .245 -.387 -.312 .423 -.090 .570 .137 1.215 .736 .481

P earson
T he
Correlat ion .073 -.189 -.062 .463 * * .084 .358 * .259 .704 * * 1 .547 * *
select ion
Sig. (2-
crit eria for
t ailed) .615 .189 .667 .001 .560 .011 .070 .000 .000
new loans is
Sum of
now more
Squares and
st rict since
Cross-
t he law
product s 4.000 -8.920 -3.560 19.440 5.200 17.840 12.440 36.040 44.080 24.120
came int o
effect Covariance .082 -.182 -.073 .397 .106 .364 .254 .736 .900 .492

P earson
** ** * ** **
Correlat ion -.009 -.368 -.155 .551 -.052 .356 .263 .459 .547 1
Int erest
Sig. (2-
capping
t ailed) .950 .009 .283 .000 .720 .011 .065 .001 .000
forces banks
Sum of
t o have
Squares and
int ense
Cross-
select ion
product s -.500 -17.380 -8.840 23.160 -3.200 17.760 12.660 23.560 24.120 44.180
during
lending Covariance -.010 -.355 -.180 .473 -.065 .362 .258 .481 .492 .902

**. Correlat ion is significant at t he 0.01 level (2-t ailed).

*. Correlat ion is significant at t he 0.05 level (2-t ailed).
c. List wise N=50

81
APPENDIX D: SPECIFIC OBJECTIVE TWO CORRELATION TABLE
Correlations c

Interes t
rate
Other capping
Interes t Capping Loan los s The bank has led to Capping
incom e of interes t provis ions default charges reduction of interes t
has rates has have rate has have in rates has
increas ed led to an reduced increas ed increas ed liquidity/fu increas ed
s ince the increas e s ince the s ince the s ince the nds m arketabil
law cam e in bank law cam e law cam e law cam e available ity of the
into effect. profitability into effect into effect into effect for lending bank
Interes t Pears on
incom e Correlatio 1 .722 ** -.030 -.126 -.116 -.027 -.029
has n
increas ed Sig. (2-
.000 .839 .384 .424 .853 .839
s ince the tailed)
law cam e Sum of
into effect. Squares
and Cros s - 43.280 28.880 -1.320 -5.560 -5.160 -1.680 -1.200
products

Covarianc
.883 .589 -.027 -.113 -.105 -.034 -.024
e
Capping Pears on
of interes t Correlatio .722 ** 1 .152 -.117 -.287 * .012 .087
rates has n
led to an Sig. (2-
.000 .292 .420 .043 .931 .546
increas e tailed)
in bank Sum of
profitability Squares
and Cros s - 28.880 36.980 6.280 -4.760 -11.860 .720 3.300
products

Covarianc
.589 .755 .128 -.097 -.242 .015 .067
e
Loan los s Pears on
provis ions Correlatio -.030 .152 1 -.271 .044 -.172 .209
have n
reduced Sig. (2-
.839 .292 .057 .760 .232 .145
s ince the tailed)
law cam e Sum of
into effect Squares
and Cros s - -1.320 6.280 46.080 -12.360 2.040 -11.080 8.800
products

Covarianc
-.027 .128 .940 -.252 .042 -.226 .180
e
The Pears on
default Correlatio -.126 -.117 -.271 1 .139 .398 ** .010
rate has n
increas ed Sig. (2-
.384 .420 .057 .337 .004 .947
s ince the tailed)
law cam e Sum of
into effect Squares
and Cros s - -5.560 -4.760 -12.360 45.120 6.320 25.360 .400
products

Covarianc
-.113 -.097 -.252 .921 .129 .518 .008
e
Other Pears on
*
bank Correlatio -.116 -.287 .044 .139 1 .046 .140
charges n
have Sig. (2-
.424 .043 .760 .337 .751 .332
increas ed tailed)
s ince the Sum of
law cam e Squares
into effect and Cros s - -5.160 -11.860 2.040 6.320 46.020 2.960 5.900
products

Covarianc
-.105 -.242 .042 .129 .939 .060 .120
e
Interes t Pears on
rate Correlatio -.027 .012 -.172 .398 ** .046 1 .139
capping n
has led to Sig. (2-
.853 .931 .232 .004 .751 .335
reduction tailed)
in Sum of
liquidity/fu Squares
nds and Cros s - -1.680 .720 -11.080 25.360 2.960 90.080 8.200
available products
for lending
Covarianc
-.034 .015 -.226 .518 .060 1.838 .167
e
Capping Pears on
of interes t Correlatio -.029 .087 .209 .010 .140 .139 1
rates has n
increas ed Sig. (2-
.839 .546 .145 .947 .332 .335
m arketabil tailed)
ity of the Sum of
bank Squares
and Cros s - -1.200 3.300 8.800 .400 5.900 8.200 38.500
products

Covarianc
-.024 .067 .180 .008 .120 .167 .786
e
**. Correlation is s ignificant at the 0.01 level (2-tailed).
*. Correlation is s ignificant at the 0.05 level (2-tailed).
c. Lis twis e N=50

82
APPENDIX E: SPECIFIC OBJECTIVE THREE CORRELATION TABLE
Propos als There has
and been
The There has reques ts increas ed
num ber of been Loan los s to tim e s pent Interes t Non-
non- increas ed provis ions res tructure in rate perform in Non-
perform in recoveries have credit m anaging capping g loans perform in
g loans on non- greatly facilities non- has have g loans
has perform in increas ed have perform in enabled s lowed hinders
increas ed g loans s ince the increas ed g loans recovery of the growth the bank`s
s ince the s ince the rate cap s ince the s ince the non- rate of ability of
law cam e law cam e law cam e law cam e law cam e perform in loans in m aking
into effect into effect into effect into effect into effect g loans the bank profits .
The Pears on
num ber of Correlatio 1 .247 .571 ** .163 .479 ** -.144 .114 .202
non- n
perform in Sig. (2-
.084 .000 .258 .000 .319 .430 .160
g loans tailed)
has Sum of
increas ed Squares
s ince the and Cros s - 48.080 11.520 29.480 7.960 24.160 -6.800 5.000 7.720
law cam e products
into effect
Covarianc
.981 .235 .602 .162 .493 -.139 .102 .158
e
There has Pears on
*
been Correlatio .247 1 .112 -.016 -.050 .094 .282 .153
increas ed n
recoveries Sig. (2-
.084 .438 .912 .729 .518 .048 .290
on non- tailed)
perform in Sum of
g loans Squares
s ince the and Cros s - 11.520 45.380 5.620 -.760 -2.460 4.300 12.000 5.680
law cam e products
into effect
Covarianc
.235 .926 .115 -.016 -.050 .088 .245 .116
e
Loan los s Pears on
** * ** *
provis ions Correlatio .571 .112 1 .320 .434 .034 .319 .203
have n
greatly Sig. (2-
.000 .438 .023 .002 .817 .024 .158
increas ed tailed)
s ince the Sum of
rate cap Squares
law cam e and Cros s - 29.480 5.620 55.380 16.760 23.460 1.700 15.000 8.320
into effect products

Covarianc
.602 .115 1.130 .342 .479 .035 .306 .170
e
Propos als Pears on
and Correlatio .163 -.016 .320 * 1 .311 * .133 .404 ** .119
reques ts n
to Sig. (2-
.258 .912 .023 .028 .356 .004 .409
res tructure tailed)
credit Sum of
facilities Squares
have and Cros s - 7.960 -.760 16.760 49.520 15.920 6.400 18.000 4.640
increas ed products
s ince the
law cam e Covarianc
.162 -.016 .342 1.011 .325 .131 .367 .095
into effect e
There has Pears on
** ** *
been Correlatio .479 -.050 .434 .311 1 .119 .218 .136
increas ed n
tim e s pent Sig. (2-
.000 .729 .002 .028 .410 .129 .348
in tailed)
m anaging Sum of
non- Squares
perform in and Cros s - 24.160 -2.460 23.460 15.920 52.820 5.900 10.000 5.440
g loans products
s ince the
law cam e Covarianc
.493 -.050 .479 .325 1.078 .120 .204 .111
into effect e
Interes t Pears on
*
rate Correlatio -.144 .094 .034 .133 .119 1 .325 -.005
capping n
has Sig. (2-
.319 .518 .817 .356 .410 .021 .971
enabled tailed)
recovery of Sum of
non- Squares
perform in and Cros s - -6.800 4.300 1.700 6.400 5.900 46.500 14.000 -.200
g loans products

Covarianc
-.139 .088 .035 .131 .120 .949 .286 -.004
e
Non- Pears on
* * ** *
perform in Correlatio .114 .282 .319 .404 .218 .325 1 .401 **
g loans n
have Sig. (2-
.430 .048 .024 .004 .129 .021 .004
s lowed tailed)
the growth Sum of
rate of Squares
loans in and Cros s - 5.000 12.000 15.000 18.000 10.000 14.000 40.000 14.000
the bank products

Covarianc
.102 .245 .306 .367 .204 .286 .816 .286
e
Non- Pears on
perform in Correlatio .202 .153 .203 .119 .136 -.005 .401 ** 1
g loans n
hinders Sig. (2-
.160 .290 .158 .409 .348 .971 .004
the bank`s tailed)
ability of Sum of
m aking Squares
profits . and Cros s - 7.720 5.680 8.320 4.640 5.440 -.200 14.000 30.480
products

Covarianc
.158 .116 .170 .095 .111 -.004 .286 .622
e
**. Correlation is s ignificant at the 0.01 level (2-tailed).
*. Correlation is s ignificant at the 0.05 level (2-tailed).
c. Lis twis e N=50

83