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Research Paper | Financial Engineering | Kenya | Volume 3 Issue 4, April 2014

Effect of Risk Factors on Disparities in Interest Rates Spread for Unsecured Loans among Commercial Banks in Kenya: A Case of Banks in Nakuru Town

Njenga M. Kamau | Wanyoike M. Daniel

Abstract: Interest rate spreads (IRS) are a common measure of financial market. It is worth noting that there is a conspicuous disparity in IRS amongst the various commercial banks in Kenya and specifically on unsecured loans. Though there have been extensive research studies on IRS, the effect of risk factors on disparities in IRS, nevertheless, has not sufficiently been researched. The objective of the study was to establish the effect of risk factors on IRS disparity for unsecured loans. The population of the study comprised of the 46 commercial banks in Kenya. The target population constituted accounting, credit and management staff of commercial banks within Nakuru town. The study adopted descriptive research design. Structured questionnaires were used to collect primary data while the secondary data was collected through the analysis of the Central Bank of Kenyas Reports and targeted commercial banks published financial statements. The SPSS was used to process and analyze the data collected. The data was analyzed quantitatively with a view of obtaining both descriptive and inferential statistical results. The findings were presented in form of frequency distribution tables, and descriptive and inferential statistics tables. According to the findings it was found that risk factors affect disparities in IRS. Risk factors were concluded to occasion a very significant effect on the spread. It was specifically inferred that there exist conspicuous disparities in interest rate spread across commercial banks; and that most banks have defined their credit risk limit. It was recommended that commercial banks should adhere with all the set CBK regulations. It was also recommended that banks need to devise other strategies that can enhance their profitability besides altering the spread, and banks ought to formulate strategies for minimizing the various types of risks that impact on interest rate spread. It was suggested that it would be important for scholars to embark on studies touching on the strategies that commercial banks can employ to minimize interest rate spread without negatively compromising their profitability.

Keywords: Interest Rate Spread, Unsecured Loans, Liquidity, Risk Factors, CBK

Edition: Volume 3 Issue 4, April 2014,

Pages: 643 - 647

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