Impact of Interest Rate Controls on Risk-taking Behavior of Kenyan Commercial Banks
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Date
2026
Authors
Wytone Yohane Jombo
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
This study investigates the impact of interest rate capping on banks’ risk-taking behaviour in Kenya, a topic that has been underexplored in the existing literature. The study uses the non-performing loans ratio and z-score as proxies for risk appetite and employs a Difference-in-Difference (DiD) approach to analyse data from 26 commercial banks from 2013 to 2019. The study overcomes the challenge of the universal application of the cap across all Kenyan banks by capitalizing on the intensity of interest rates charged by different banks before the capping policy. The findings suggest that banks’ risk appetite significantly increased post-capping, indicating the negative impact of interest rate controls on banks. This is consistent with the general trend observed in related literature. The effects vary across bank peer categories, with medium-sized banks exhibiting the most pronounced changes. The study also reveals that the effect of interest rate capping on risk-taking behaviour varies based on the capital adequacy levels of banks. Based on these findings, the study calls for a reconsideration of the universal application of interest rate caps and suggests tailored approaches based on bank size or capital adequacy. It urges regulatory bodies to adopt a dynamic approach and conduct periodic reviews to manage the evolving risk landscape. The study emphasizes the importance of continuous dialogue between regulatory bodies and financial institutions to foster adaptive regulatory frameworks that balance stimulating economic growth and maintaining financial stability.