BANK CHARACTERISTICS, MACROECONOMIC VARIABLES AND LENDING RATES AMONG COMMERCIAL BANKS IN KENYA MAUBI ANDREW MOKAYA (D86/CTY/28539/2014) A THESIS SUBMITTED TO THE SCHOOL OF BUSINESS IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF DOCTOR OF PHILOSOPHY IN FINANCE, KENYATTA UNIVERSITY OCTOBER, 2018 DECLARATION This thesis is my original work and has not been presented for a degree or any other award in any other University or any other award. ………………………………… ………………………………… Signature Date Mr. Maubi Andrew Mokaya D86/CTY/28539/2014 We confirm that the work in this thesis has been done by the candidate under our supervision as the appointed university supervisors. ………………………………… ……………………………….. Signature Date Dr. Ambrose O. Jagongo Department of Accounting and Finance, School of Business, Kenyatta University ………………………………… ………………………………… Signature Date Dr. Rosemary M. James Department of Management Science, School of Business, Kenyatta University ………………………………… ………………………………… Signature Date Dr. Duncan O. Ouma Department of Economic Theory, School of Economics, Kenyatta University ii DEDICATION This thesis is dedicated to my Wife Sheila Bonareri Mokaya for her support and encouragement even when the going seemed tough. To my parents Wilson Maubi Mokaya and Elizabeth Getuba Mokaya who have been a source of strength in my academic resolve and for making me go to school with their little earnings early in life iii ACKNOWLEDGEMENT I thank the Almighty God who enabled me to have a reason, mental soundness and good health while working on this thesis. My gratitude is to the Kenyatta university Department of Accounting and finance for allowing me to research on the area that was of interest to me. Special thanks my supervisors Dr. Ambrose Jagongo, Dr. Rosemary James and Dr. Duncan Ouma for their relentless support as they guided me through building on this thesis. Dr. Job Omagwa and Dr. Lucy Wamugo for their contribution in shaping this research, the chairman-department of accounting and finance Dr. Eddie Simiyu, Dr. Mungai, Dr. Ndede, Dr. Koori, and Dr. Lucy Kamau. Finally Dr. SMA Muathe who defined this journey and ensured I was on course and my classmate Dr. Salome Musau for her moral support and everyone who inspired me to work on this thesis. I also thank my dear wife Sheila Bonareri, Daughter Angel Moraa, Son Aydan Andy and Daughter Adelle Moraa for their understanding, patience and support as I worked on this thesis. Many thanks to my Brother Collins Ongeri Maubi without whom the PhD Journey would just have been a dream. Through his constant encouragement, I have made it this far. iv TABLE OF CONTENTS Declaration.................................................................................................................... ii Dedication ....................................................................................................................iii Acknowledgement ....................................................................................................... iv Table Of Contents ........................................................................................................ v List Of Tables ............................................................................................................... x List Of Figures............................................................................................................ xii Operational Definition Of Terms ............................................................................xiii Abbreviations and Acronyms ................................................................................... xv Abstract ..................................................................................................................... xvii CHAPTER ONE:INTRODUCTION ......................................................................... 1 1.1 Background to the Study .................................................................................... 1 1.1.1 Bank Characteristics ...................................................................................... 4 1.1.2 Industry Characteristics ................................................................................. 7 1.1.3 Macroeconomic Variables ............................................................................. 8 1.1.4 Lending Rates .............................................................................................. 10 1.1.5 Political Risk ............................................................................................ 13 1.1.6 Commercial Banking Sector in Kenya .................................................... 15 1.2 Statement of the Problem ................................................................................. 17 1.3 Objectives of the Study .................................................................................... 19 1.3.1 General Objective .................................................................................... 19 1.3.2 Specific Objectives .................................................................................. 19 1.4 Research Hypotheses ....................................................................................... 20 1.5 Significance of the Study ................................................................................. 21 1.6 Scope of the Study ........................................................................................... 22 1.7 Limitation of the Study .................................................................................... 23 v 1.8 Assumptions of the Study ................................................................................ 23 1.9 Organization of the Study ................................................................................ 23 CHAPTER TWO: LITERATURE REVIEW ......................................................... 24 2.1 Introduction ...................................................................................................... 24 2.2 Theoretical Literature Review ......................................................................... 24 2.2.1 Loanable Funds Theory ............................................................................... 24 2.2.2 Liquidity Preference Theory ........................................................................ 26 2.2.3 Theory of Price ........................................................................................ 28 2.2.4 Classical Theory of Lending rates ........................................................... 29 2.2.5 Fisher’s Theory ........................................................................................ 30 2.3 Empirical Literature Review ............................................................................ 31 2.3.1 Bank Characteristics and Lending Rates ................................................. 31 2.3.2 Macroeconomic Variables and Lending Rates ........................................ 34 2.3.3 Bank Characteristics, Macroeconomic variables and lending rates......... 35 2.4 Summary of Literature Review and the Research Gap .................................... 43 2.5 Conceptual Framework .................................................................................... 47 CHAPTER THREE: RESEARCH METHODOLOGY ........................................ 49 3.1 Introduction ...................................................................................................... 49 3.2 Research Philosophy ........................................................................................ 49 3.3 Research Design............................................................................................... 50 3.4 Theoretical Framework .................................................................................... 50 3.5 The Empirical Model ....................................................................................... 51 3.5.1 Moderation Effect Model ............................................................................. 52 3.6 Target Population ............................................................................................. 53 3.7 Data Collection Procedure ............................................................................... 53 3.8 Operationalization and Measurement of Variables.......................................... 54 vi 3.9 Diagnostic Tests ............................................................................................... 55 3.9.1 Normality Test ......................................................................................... 56 3.9.2 Heteroskedasticity Test ............................................................................ 56 3.9.3 Multicollinearity Test............................................................................... 56 3.9.4 Autocorrelation ........................................................................................ 57 3.9.5 Stationarity Test ....................................................................................... 57 3.9.6 Test for Fixed or Random Effects ............................................................ 57 3.10 Data Analysis and Presentation ....................................................................... 58 3.11 Ethical Considerations ..................................................................................... 59 CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSIONS ................... 60 4.0 Introduction .....................................................................................................