Effect of Interest Rate Capping on the Payment of Corporation Tax by Tier Three Banks in Kenya

Abstract

The interest rate charged on loans and the rate of interest paid on bank deposits, which translates to cost of funds both have a significant impact on the profitability of any commercial banks and hence the corporation tax paid therof. In September 2016, the Banking Act was amended through insertion of clause 33B controlled lending interest rates to a maximum of 400 base points above CBR rate and interest on deposits to not less than 70% of the CBR rate. This study sought to determine the effects of interest rate capping on the Corporation tax paid by the tier three banks in Kenya. Specifically, the study examined the effect of profitability margins, loan book quality, cost of bank deposits, and cost of overheads on the payment of corporation tax by tier three banks in Kenya. The study utilized descriptive research design and targeted 18 tier three commercial banks leaving out Mayfair and SBM banks that were new, and those that had either been acquired by other banks or were under receivership or statutory management as at December of 2018. The findings indicated that cost of overheads have a positive and significant relationship with corporation tax payment by tier three banks (β=0.148542, p=0.016), profitability margin has a positive and significant relationship with corporation tax payment by tier three banks (β=0.315405, p=0.000), interest rate capping (control variable) had a negative and significant relationship with corporation tax payment by tier three banks (β=-3.08364, p=0.001), cost of deposits have a negative but insignificant relationship with corporation tax payment by tier three banks (β=-0.05854, p=0.398), while loan book quality has a negative but insignificant relationship with corporation tax payment by tier three banks (β=-0.00443, p=0.795). Based on the findings, the study concluded that the introduction of interest rate capping had a negative and significant effect on corporation tax payment by tier three banks in Kenya. From the findings, the recommends that the government through the National Assembly should reconsider removing the interest rate capping. This is because it has adverse effects to all stakeholders including the government, banks and customers.