Interest Rate Risk and Market Value of Firms in Kenya: A Gray Rhino perspective on Commercial Banks Listed at the Nairobi Securities Exchange

The effect of interest rate risk exposure on the market value of commercial banks have become increasingly significant in the modern financial economy due to the interconnected financial systems. Interest rate risk has a positive influence on bank development indicators, but this relationship diminishes at high-interest rate fluctuations. Interest rate risk has impacted on investments and aggregate demand, making the loans become too expensive hence triggering the default risk and liquidity risks locally. The purpose of this study was to identify the impact of interest rate risk on the market value of commercial banks listed at the Nairobi Securities Exchange. A census of all the listed firms was adopted. The study utilized secondary data from published financial statements and market share data from the Nairobi Securities Exchange database. The study adopted the structural equation model for analysis. The measurement model was applied to test the validity and quality criteria for the variables. The structural model was then employed to establish the research objectives of the study. Bootstrapping path analysis results showed that interest rate risk had a significant negative impact on the market value of commercial banks in Kenya. The results suggest that high levels of interest rate risk erodes the market value of banks which has a chain effect on the economy. In addition, bank size was found to partially moderate the relationship between interest rate risk and market value. These results are consistent with the Basel III framework where banks are required to maintain sufficient net assets to cushion against systemic risks. The study recommends that banks should undertake hedging against the interest rate risk and stop solely relying on fixed investments such as government bonds. Instead, they should diversify into investments with floating interest rates.