Effect of Interest Rate Regulation on the Relationship Between Loan Underwriting Procedures and Financial Performance of Commercial Banks in Kenya

Abstract

The first objective was to determine the relationship between collateral requirements (credit history of customer, customer income) and financial performance of commercial banks in Kenya. The second objective was to determine the effect of interest rate regulation on the relationship between loan underwriting procedures and financial performance of commercial banks in Kenya. The study used descriptive and correlation research design and the research philosophy used was positivism. The study adopted a census survey and purposive sampling method targeting 43 bank managers, 43 credit managers and 43 operations managers of the 43 commercial banks in Kenya for period 2013 to 2018. Document analysis guide was used to collect secondary quantitative data for period 2013 to 2018 from the commercial bank’s financial reports and questionnaires were used to collect primary data. Data was analyzed using multiple linear regression method. The findings of the study revealed that loan underwriting procedures; collateral requirements measured by (credit history of customer and customer income) have a significant and negative impact on ROA of commercial banks in Kenya. The study findings revealed that there exists a relationship between interest rate regulation, loan underwriting procedures and financial performance of commercial banks in Kenya. The study recommended that commercial banks should strengthen its loan underwriting procedures, use the services of Credit Reference Bureau, train credit officers on how to scrutinize customers and give out loans which have collateral security only.

Keywords: Loan underwriting, interest rate regulation, financial performance, commercial banks, collateral requirements.

DOI: 10.7176/RJFA/12-4-04

Publication date: February 28^th 2021