Abstract: The increasing propensity of commercial banks to take part in derivative activities is one of the notable developments in the present day financial markets. Latterly, the financial innovation improvements, deregulation and development of the financial markets, and banks” margins decrease, due to low-quality loan applicants, motivate the commercial banks to provide advanced services and products to expand their profits. Profits from traditional banking activities has been decreasing whilst the competitiveness of markets have been increasing thus forcing banks to undertake derivative activities. The objective of this study was to establish the effect of financial derivatives on the financial performance of commercial banks in Rwanda. To achieve this the study was guided by the following specific objectives; to determine how the risk management in derivatives affects the financial performance of commercial banks in Rwanda, to examine if efficiency in trading of derivatives affects the financial performance of commercial banks in Rwanda, to establish if price stabilization in derivatives affect the financial performance of commercial banks in Rwanda and to explore if price discovery in derivatives affect the financial performance of commercial banks in Rwanda. This study adopted a descriptive research design in soliciting information on effects of liquidity management on financial performance of commercial banks. The target population was 14 commercial banks in Rwanda. The sampling technique that was employed is simple random sampling and the sample size was 42 respondents. Primary quantitative data was collected by use of self-administered structured questionnaires. The researcher also used secondary data derived from the audited financial statement of the commercial banks for the period 2014 to 2016. The data collected was analyzed, with respect to the study objectives, using both descriptive and inferential statistics. The data was analyzed using descriptive statistics such as mode, median, mean, standard deviation. Multiple regression analysis was employed to determine relationship between liquidity management and financial performance of commercial banks in Rwanda. Data was presented in tables, charts, figures and mathematical expressions. Return on Assets (ROA) was used as the proxy for financial performance while financial derivatives, liquidity ratio and shareholders‟ equity ratio were the predictor variables. Content analysis was used to operationalize qualitative data and eventually was analyzed using statistical methods for inferential conclusions. F-test was used to test the significance of the overall model xvii while significance of each specific variable was tested using T- test. Based on the research findings, it can be concluded that ownership structure, market structure and business risks play significant role in explaining interest rate spread. The study recommends that the government and policy makers should implement sustainable political and macroeconomic environment to boost investors’ confidence in the banking sector which would go a long way in reducing interest rate spread. This study did not include all determinants of IRS and a further study is recommended to include other factors such as effects of information and communication technology on interest rate spread.
Keywords: Inflation rate, Financial performance, Commercial banks in Rwanda.
Title: EFFECT OF INTEREST RATE SPREAD ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN RWANDA: A CASE OF COMMERCIAL BANKS IN RWANDA
Author: TONA DIDINE, Dr. PATRICK MULYUNGI
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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