Effects Of Inflation On Commercial Banks’ Lending
[A CASE OF KENYA COMMERCIAL BANK LIMITED]

The purpose of this study was to determine the relationship between annual inflation rate and Kenya Commercial Bank base lending rate, new lending volumes and loans defaulting. This study was guided by the following three research questions:(i) What is the relationship between annual rates of inflation rate and base lending interest rate in Kenya from the year 2004 to 2013?, (ii) What is the relationship between both inflation rate and base lending rate and KCB new annual lending volumes from the year 2004 to 2013? (iii) What is the relationship between inflation rate and KCB annual loan default rate?

The study adopted both descriptive research design with the target population comprising of 450 KCB employees from both management and non- management staff spread in all the 15 branches within Nairobi County and secondary data on inflation rates, new volumes of lending to creditors, loans default volumes and bank base lending rates. A sample size of 199 KCB staff was selected through multi-stage sampling procedure while purposive sampling was used to select secondary data on KCB new lending volumes, loan defaulting, KCB base lending rates and the annual inflation rates. Secondary data was obtained from banks administrative records and documentation while data on inflation rates was obtained from the Kenya National Bureau of Statistics, through email. Primary data was mainly obtained from KCB employees using self administered questionnaires.

Primary data was analyzed using descriptive statistics and secondary data was analyzed using inferential statistics with an aid Statistical Package for Social Sciences (SPSS) program. Results of regression analysis and primary data were presented using frequency tables, charts and models.

The first major findings was the positive relationship between inflation rate and the base lending rate charged by the bank, as inflation levels rises, so did the bank‟s base lending rate both from the key informant figures and the regression analysis of the secondary  data, showing that inflation has a significant effect on KCB base lending rate. The second major finding was that inflation has moderate effect on KCB new lending volumes; however an increase in base lending rate contributed most towards the reduction in the lending volumes. The third finding revealed that a rise in inflation led to high rate of loan defaulting activities in the bank.

Conclusion drawn from the findings indicated that a rise in the inflation figures contributes to an increase in the base lending rate, this may be attributed to the fact that a rise inflation leads to a reduction in the purchasing power of money hence the bank demands a higher base lending rate to cover for assuming this credit risk. Secondly inflation by itself contributes marginally to the lending volumes, however as the base lending is increased the uptake of loans is significantly reduced which may be attributed to fact that customers repayment ability is hampered with increase in the base lending rate. And finally a rise in inflation also affects the loan default rate, since the banks are forced to increase their interest charged ,serious affecting customers ability to service their loans ,on the other hand arise in inflation may lead to an influx of less credit worthy borrowers who may easily default on their repayment obligations.

Based on the findings various recommendations were made. First the banks should have policy on minimum base lending rate to be charged on loans and in order to maintain this, the bank would need to diversify to other sources of incomes streams such as aggressively undertaking non interest related activities e.g. collection of commission and fees, to cushion it during high inflation period when the uptake of loans dwindle since the organization has no control of macroeconomic factors affecting the inflation of the country. Secondly the bank can encourage borrowers to take fixed interest loan  repayment offers, rather than the flexible repayment models to reduce the rate at which loans are defaulted as a result of fluctuation of the repayments amounts.