Determinants of interest rate spreads in Kenya

This paper primarily provides an econometric analysis of the macroeconomic and industryspecific factors that influence the behaviour of the ex-post interest rate spreads of commercial banks in Kenya over the last decade. A panel data estimation is carried out on the assumption that banks are profit maximizers and thus derives a condition for bank intermediation spread. The variables used in the study are the exchange rate risk, the Treasury bill rate, the statutory reserve requirements, public sector share of credit, the liquidity ratio; the operating inefficiency, market power, credit risks and the quality of loans. Bank-level quarterly panel data for the period 2002 (Quarter 2) to 2010 (Quarter 4) for 30 banks is used in the study. Higher interest rate spreads were found to be associated with high treasury bill rate, operation inefficiency, a high public sector share of credit and concentration of market power to a few banks. The study recommends lower statutory reserve requirement or payment of interest on the statutory cash reserves to commercial banks, innovation in banks' operations and products, development of efficient financial markets disintermediation and a revision of the deposits insurance cover