Measuring the Impact of Risk on Bank Spreads in Commercial Banks in Kenya

Abstract

This study looks at the impact of risk on bank spreads in Kenya’s banking sector using data from 13 banks selected through purposive sampling on the basis of available data. Two forms of risk namely credit risk and liquidity risk are analysed against bank spread as dependent variable. Bank spread is measured in two ways: interest rate spread and gross margin. The data is analysed using correlation and regression statistics. The findings on credit risk are non-significant and not in the expected direction of the study hypothesis. Liquidity risk results were negative and significant with both spread measures leading to the conclusion that banks recover the opportunity cost of holding low earning assets from customers. There is need for banks to come up with more innovative investment products for its depositors to allow for longer term holding of such deposits thus lowering liquidity risk premiums. Government would also do well to manage the level of borrowing from the domestic market so as to re-direct commercial bank lending away from the low earning government paper to private lending which has higher yields. This would reduce the need to cover for the opportunity cost of holding so much assets in liquid form.

Keywords: Credit risk, liquidity risk, bank spread

DOI: 10.7176/RJFA/12-10-09

Publication date:May 31^st 2021