Assessing the Influence of Interbank Rates and Transactions Account as a Non-Interest Income on Financial Performance of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

This study examines the influence of interbank rates, hedging, and transaction account income on the financial performance of commercial banks listed on the Nairobi Securities Exchange (NSE). Using a cross-sectional survey and secondary data from 2000 to 2021, the research employs a multiple regression model to determine the relationships between these variables and financial performance. The results show that a unit increase in interbank rates and hedging causes a 0.461-unit increase in bank performance, with a significant impact (T = 3.518, p = 0.000). Transaction account income has a minimal effect, contributing only 0.024 units. The findings align with studies such as Goselin (2007), which found no direct link between central bank rates and financial market development, and are consistent with research showing that hedging positively affects firm performance. The model explains 65.1% of the variation in bank performance, with interbank rates having the most significant effect (β = 0.778). The hypothesis that interbank rates significantly influence financial performance is confirmed, while transaction account income is found to be statistically insignificant. A further analysis incorporating hedging into the model reveals that interbank rates, hedging, and transaction account income together explain 72% of the variation in financial performance (adjusted R² = 0.717), indicating a strong positive relationship. These findings provide valuable insights into how banks can optimize these variables to improve financial performance. This study offers critical implications for banking strategies, particularly in managing interbank rates and hedging mechanisms to enhance financial stability and performance.