Abstract:
Banking institutions play a major role in economic growth and development through provision of credit to execute economic activities. There is a broad body of literature that addresses issues of bank lending behavior. However, little effort has been devoted to explaining what determines within country variation of the supply side (banks) choices in their lending practices. This study, therefore sought to establish the determinants of lending within the country from the supply side. The study explored the effect of volume of deposit, interest rate and liquidity ratio on total loan advanced by selected commercial banks in Nairobi, Kenya. This research employed a descriptive
correlation research design and was informed by theory of Money Supply. The population of study constituted all the ten banks that were listed at the Nairobi Securities Exchange (NSE) as at the year 2012. Purposeful sampling technique was used to constitute a sample size of nine commercial banks in this study. Co-operative Bank of Kenya was therefore excluded as it was listed in the NSE market in the year 2008. The study focused on a ten-year period analysis (2002-2011) of the comprehensive financial statements of all commercial banks listed by NSE. A data collection form was used to collect data through document analysis. The study used both descriptive and inferential statistics in the analysis. The study adopted an econometric approach to test the degree
of correlation between the variables by employing the multiple regression analysis of the Ordinary Least Square (OLS) method. The findings indicated that lending interest rates are negatively related and significantly affect the total loans advanced. With regard to the liquidity, this study revealed that banks with more liquid assets extend more credit to borrowers. Further, volume of deposit in commercial banks has a significant and positive effect on the total loan advanced and that the liquidity ratio also positively and significantly affects the total loans advanced. This means that as the Central Bank lending rate to commercial banks increases, the Commercial Bank lending rate to the private sector increases and vice versa.
