An Empirical Analysis of Interest Rate Spread in Kenya

"The study aimed to explain the factors determining interest rate spread for Kenya’s banking sector. For the pre-liberalization period, the minimum and maximum ceilings on deposit and lending rates set a maximum interest rate spread. Variations in the spread reflect monetary and fiscal policy actions, where expansionary fiscal policy partly increased inflationary pressure and the monetary authority responded by tightening the monetary policy and revising interest rates upwards. During the post-liberalization period, we expect the spread to narrow to reflect efficiency gains and reduced transaction costs with the removal of distortionary policies and strengthening of the institutional set-up. However,Kenya’s experience indicates a widening spread in the post-liberalization period. Our results show that the interest rate spread increased because of yet-to-be gained efficiency and high intermediation costs. The increase in spread in the post-liberalization period stemmed from the failure to meet the prerequisites for successful financial reforms and the lag in adopting indirect monetary policy tools and reforming the legal system."