The Relationship amongst Interest Rate Risk, Bank Competitiveness, and Financial Performance: Evidence from Commercial Banks in Kenya
Abstract
The banking sector in Kenya plays a crucial role in financial intermediation and significantly contributes to economic development. Consequently, even minor variations in the financial performance of this industry can have significant effects on the economy. Despite the regulations and actions implemented by the regulatory authority, certain banks continue to face difficulties in their financial performance. Thus, the purpose of this study was to investigate the effect of interest rate risk on the financial performance of commercial banks in Kenya. Moreover, this study endeavoured to ascertain the moderating effect of bank competitiveness on the relationship between interest rate risk and financial performance of commercial banks in Kenya. The theories underpinning this study included Financial Intermediation Theory, Liquidity Preference Theory of Interest Rates, and Market Power Theory. The study further embraced an explanatory research design. The study used a census approach rather than sampling, considering the target population comprised all thirty-nine (39) commercial banks that were operating in Kenya as of December 2023. The study analysed data using descriptive statistics and panel multiple regression analysis. The results of the study revealed that interest rate risk portrayed a significant effect on the financial performance of commercial banks in Kenya. The results further showed that bank competitiveness indicated an insignificant moderating effect on the association between interest rate risk and financial performance. The study recommends that the management of Kenyan commercial banks should strengthen the adoption and implementation of effective techniques for measuring and monitoring interest rate risk in order to pinpoint the origins and extent of the risk.
Keywords: interest rate risk, bank competitiveness, financial performance, commercial banks.
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