EFFECT OF INTEREST RATES ON CREDIT ACCESSIBILITY IN KENYA: A CASE OF COMMERCIAL BANK BRANCHES IN NANDI COUNTY

Abstract

Interest rates contribute significantly to the performance of commercial banks; this depends on the value of interest charged on credits or loans issued. Borrower’s access to credits or loans is determined by the level of interest charged by commercial banks. Balancing of the different interest rates have made difficult to balance the ideal rate that will propel effective credit borrowing conditions. The fluctuations of interest rates in the market make it difficult to determine accurately the elasticity of loan accessibility this means that financial institutions find it difficult to predict their loan performance. Therefore, the general objective was to investigate the effect of interest rates on credit accessibility in commercial bank branches in Nandi County, Kenya. The specific objectives were to determine the effect of lending rate on credit accessibility in commercial bank branches in Nandi County, Kenya; assess the effect of deposit rate on credit accessibility in commercial bank branches in Nandi County, Kenya; find out the effect of interbank rate on credit accessibility in commercial bank branches in Nandi County, Kenya; and establish the effect of base rate on credit accessibility in commercial bank branches in Nandi County, Kenya. The theoretical frameworks of the study were Fisher's theory of interest and Keynes theory of liquidity preference. The study used descriptive and correlation research design, with the target population being 98 staff that included; 15 branch managers and 83 credit officers from the 15 commercial bank branches of Nandi County. Due to the small size of the target population, the study employed census techniques. Questionnaires were issued to the respondents, and the data collected was analyzed using descriptive and inferential statistics. The findings showed a strong positive relationship existing between the loan taken and the four variables: lending, deposit, interbank, and base interest rates. At P<0.05 the study found that lending interest rates contributes 37.6%, deposit interest rates 17.9%, interbank interest rates 6.4% and base interest rates 12.6% of credit accessibility. These interest rates determine the amount and type of credit borrowed among households. The study concludes that interest rates have a strong positive relationship effect on loan accessibility. Therefore, policy makers in the financial and credit sectors need to develop viable strategies on interest rates to enhance loan accessibility.