Interest Rate Capping and Performance of Nairobi Securities Exchange, Kenya

Abstract

This studied the effect of interest rate capping on the performance of Nairobi Securities Exchange in Kenya after the adoption of the Banking Amendment Act (2016) following the Banking Amendment Act (2016). The new law imposed regulations lending rates on interest rates charged by commercial banks and interest rates applied on savings rate applicable on customer savings in commercial banks.  The effect of lending rates, Treasury bills rates and savings rate on performance of Nairobi Securities Exchange in Kenya were the specific objectives of the study. The moderating effect of the volume of credit on the relationship between interest rate capping and the performance of Nairobi Securities Exchange in Kenya was also considered. Classical Theory of Interest Rates, Fisher’s Theory, the Arbitrage Pricing Theory and the Efficient Market Hypothesis were used in the study. Positivism philosophical views and explanatory design were employed.  All the 20 firms which yield the Nairobi Securities Exchange (NSE) 20 Share Index constituted the target population. The census sample design approach was used to collect the secondary data. The study performed diagnostic tests, including the test for autocorrelation, homoscedasticity, multicollinearity, normality, model specification and model stability. Tests for time series properties, stationarity and cointegration were conducted. Furthermore, model specification and model stability checks were also performed, after which data was analyzed by use of Autoregressive Distributed Lag Model to find out the long run relationship and Autoregressive Distributed Lag Error Correction Model to establish the short term relationship. From the results, it was evident that interest rate capping affects performance of Nairobi Securities Exchange in several ways. It was generally concluded that interest rate capping affects performance of Nairobi Securities Exchange in Kenya. It was concluded that interest rate capping has an effect on the performance of Nairobi Securities Exchange in the long run.  Lending rates had no effect on the performance of Nairobi Securities Exchange in the long run. Conversely, lending rate had a negative impact on the performance of Nairobi Exchange in the short run. It was, however, observed that Treasury bill rates did not affect the performance of Nairobi Securities Exchange in the long run. However, there existed a negative relationship between Treasury bill rates and the performance of Nairobi Securities Exchange in the short run.   Availed by banks be an inverse moderator of the relationship in the long run. However, volume of credit creates a positive moderating relationship between interest rate capping and the performance of Nairobi Securities Exchange. In conclusion, it’s recommended that Central Bank of Kenya should refrain from reducing lending rates since it results into a decrease in prices of stocks, thus locking away prospective investors and curtailing economic growth.

Keywords: Credit Access, Interest rate Capping, Securities Market