Effect of Liquidity Creation on the Relationship between Interest Rate Spread and Firm Performance

Abstract

The interest rate spread plays a crucial role in shaping the performance of commercial banks, as a wider interest spread allows banks to generate higher interest income, leading to improved profitability and overall performance. However, by effectively creating liquidity, banks can expand their lending capacity and generate wider interest rate spread, which positive impacts their overall performance. The goal of this study was to determine the relationship between interest rate spread, liquidity creation and performance of commercial banks in Kenya. A descriptive research design was employed, utilizing secondary data from 38 commercial banks in Kenya spanning from 2008 to 2018. The Baron and Kenny approach, employing a random effects model, was used to assess the potential intervening effect of liquidity creation. The findings revealed a significant and positive relationship between interest rate spread and performance of the banks; however, the results indicated that liquidity creation did not act as an intervening variable in this relationship.

Keywords: Interest rate spread, liquidity creation, commercial banks in Kenya, firm performance