Interest Rate Risk Management for Commercial Banks in Kenya

We show empirically that bank's exposure to interest rate risk or income gap determines the structure of the balance sheet. In particular, we show that in Kenya, commercial banks typically retain a large exposure to interest rates that can be predicted through the income gap. We also establish the sensitivity of income gaps to market interest rates as determined by the Central Bank of Kenya (CBK) through treasury instruments. Quantitatively, a 200 basis point change in CBK rates would lead to a change of net income equivalent to 0.4% of total assets of the bank.