The effect of lending rates on economic growth in Kenya.

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.