INFLUENCE OF COMMERCIAL BANKS’ WEIGHTED INTEREST RATE ON CONSTRUCTION INDUSTRY GROWTH RATE IN KENYA

Abstract

The importance of construction industry in any economy cannot be overemphasized. This is due to the major role played by this industry in building construction, dam construction and many other major infrastructure developments in the economy.  In Kenya, this industry is indispensable. Over and above the above-stated roles, it is also a major contributor to the country’s gross domestic product (GDP). In line with this, this study sought to establish whether the industry’s growth rate is affected by interest rates due to its heavy reliance on borrowed funds. To achieve this goal, data was obtained from the Kenya National Bureau of Statistics (KNBS) and the Central Bank of Kenya (CBK). Time Series data was collected using an abstraction sheet for two variables; Construction Output Growth Rate (COGR) and Commercial Banks’s Weighted Interest Rate (CBWR) for 48 years (1977 – 2024). Data was analysed using EViews software version 10. Analysis was done in three ways which included graphical, correlation and regression analysis. Results showed that construction industry output growth rate is impacted by commercial banks’ interest rates. Graphically, it is observed that if CBR rises, COGR drops, even though not immediately. Correlation analysis showed that COGR and CBWR are inversely correlated with a coefficient (r) of -0.336. Finally, the first differences of COGR were regressed on the first differences of CBWR and gave an R² value of 0.000074 in the current year of construction. But when COGR is regressed on lagged CBWR by one (1) year up to thirteen (13) years, the R² value changed to 0.365 with a regression coefficient (β) of -0.481438 indicating that COGR is negatively impacted by CBWR, but not in the current year of construction but much later. These findings can be used to inform policy formulation for the construction industry growth in Kenya.