Joint Effect of Interest Rate Spread, Liquidity Creation and Firm Characteristics on Firm Performance

Abstract

The study had a general objective to evaluate the relationship among interest rate, liquidity creation, firm characteristics, and performance of commercial banks in Kenya. The study relied on balanced panel data where secondary data was collected from 38 active financial institutions in Kenya for a ten-year period from 2008-2018. The study used a descriptive research design and was subjected to random effects panel regression analysis. Hypotheses were tested at 95 percent confidence levels (p<0.050) to determine the effect of the independent variable, moderating variable and intervening variable on the performance of the banks which was the dependent variable. The results indicated that interest rate spread as an independent variable, was significant in determining the performance of the banks. The study also established that liquidity creation was a non-intervening variable in the relationship between interest rate spread and performance. Firm characteristics including firm size, age and ownership did not exert a moderating effect on the relationship between interest rate spread and performance. Moreover, the results revealed a significant joint effect of interest rate spread, liquidity creation and the firm characteristics on performance.  The results of this study add to existing knowledge by using liquidity creation as an alternative metric for performance measurement, which the banks can utilize to remain afloat by meeting their immediate monetary demands for their external clients and their internal daily financial requirements. Maintaining a narrowed spread in interest rates is also crucial in maintaining a competitive edge in an increasingly competitive financial market. The study also contributes to improving the existing literature and body of information in determining the predictors of firm performance in Kenya. It provides evidence against firm characteristics as unreliable predictors.

Keywords: Interest rate spread, liquidity creation, firm characteristics, firm performance