The effects of interest rate fluctuations on loan deffault levels : a case study of commercial Banks in Nakuru Municipality

Abstract

This study was conducted to explain the effects of fluctuating interest rates on the loan default levels noted by the key commercial banks in Nakuru municipality and to establish the effects of collateral, duration of a tenn loan, the size of the business and the effect of economic growth on loan default. The analysis showed that in the recent past, the banking sector in Kenya has experienced loan management problems primarily resulting in the increased levels of default under the fixed interest rate regimes and the fluctuating interest rate regimes. Hypotheses were tested with respect to this key objective. Data was collected from the commercial banks in Nakuru municipality and the hypotheses were tested using the students’ t- distribution and regression analysis. The findings of the study were that duration and collateral do not impact strongly on the rate of default under either interest regimes but the economic growth was noted as a key factor influencing the rate of default in both interest rate regimes. The sensitivity of the factors were studied under the loans granted to individuals, those granted to small businesses a.nd those granted to large corporations. The proportion of small and medium sized finns defaulting on loan obligations was found to been significantly larger than the large finns.