Abstract:
Kenya targets a growth rate of an average of 10
percent per annum by 2030. However, the country‟s
economic growth rate since 2009 has been an
average of 4.9 percent with the current being 7.52
percent. Hence, achieving this growth target is
ambitious considering that the country faced
challenges such as COVID-19, drought and famine.
This study therefore examined the significance of
lending rates in stimulating real output within the
economy over the period under study. The main
objective of study was to assess the effect of lending
interest rate on economic growth in Kenya. The
study adopted explanatory research design that is
quantitative. The study was guided by neoclassical
endogenous growth theory. The major sources of
data were national accounts data from the Kenya
National Bureau of Statistics (KNBS) Economic
Surveys, Statistical Abstracts and International
Financial Statistics (IFS) site for the period 1990-
2021. The study used a vector error correction
model. The variables were first tested for unit root
thereafter Johansen cointegration Technique was
used to test the long run relationship of the
variables. The study found that there were unit roots
at levels but became stationary after first difference.
All the assumptions of linear regression were tested
and the data was found to follow normal
distribution, no collinear relationship among the
independent variables, data was homoscedastic and
also no serial correlation found. Results showed the
lending rates had long run effects on the economic
growth. Specifically, lending interest rate (β=-0.063,
p<0.05) have a negative and significant long run
relationship on economic growth in Kenya. The
study concludes the central bank of Kenya may
instill sound fiscal and monetary policies for
regulating lending interest rate in curbing the level
of inflation and money supply in the economy,
hence generating economic growth.
