Interest-Rate Capping and the Security Prices of Bank Companies Listed on the Nairobi Securities Exchange, Kenya

Abstract

Banks play an essential role in the creation of new capital in a country, help the growth process by collecting the savings of the individuals and lend them out to a business-people and manufacturers. Banks also play an essential role in the financial system and the economy by allocating funds from individuals with excess cash to borrowers in an efficient manner; thus, make the overall economy more efficient. In September 2016, the Kenyan government enacted a law capping interest to protect borrowers from the exorbitant interest rate. After the enactment of the interest-rate capping law, the share index of bank companies in the NSE N20 continued to decline. The decline is worrying and, of great concern to the investors and the economy as a whole, prompting the researcher to investigate the effect of interest-rate capping on the security prices of the bank companies listed on the NSE, Kenya. The study was guided by the Signaling Theory, the Efficient Market Hypothesis, and the Market Expectation Theory. The study collected data using a questionnaire and schedules from 11 banks listed on the NSE, Kenya, used the event study methodology, and analyzed data using the ANOVA technique. The study revealed a p-value of 0.003 and concluded that interest-rate capping significantly affected the security prices of banks companies listed on the NSE, Kenya, at a 5 percent significant level. The study recommends further research to carried on specific companies that were affected by the decline in security prices. Also, future research should be on companies on other security exchange; finally, the regulators to compel the bank companies to date all their records and financial statement.