Loan pricing techniques, regulatory environment on performance of tier one commercial banks in Kenya

Abstract

This study investigates the effect of loan pricing strategies, specifically cost plus pricing, risk-based pricing, and market-based pricing, on the performance of tier 1 commercial banks in Kenya. The study is motivated by inconsistent and inadequate loan pricing policies that have resulted in a rising number of non-performing loans (NPLs), diminishing profitability, and deteriorating asset quality throughout the industry. The objectives are to evaluate the effect of each pricing model on key performance indicators, including returns on assets (ROA), returns on equity (ROE), and non performing loan (NPL) rates. The target population encompassed all designated Tier 1 commercial banks in Kenya, from which a representative of 90 observations sample was obtained through a purposive sampling method. A collection of secondary data was obtained from audited financial statements and regulatory reports spanning 2015 to 2024. The study found that cost plus pricing (β = 0.053, p = 0.677), risk-based pricing (β = 0.043, p = 0.726), and market-based pricing (β = 0.098, p = 0.368) had weak, negative, and insignificant effects on Tier 1 banks’ performance, while the regulatory environment (β = 0.865, p = 0.376) showed a mild positive but insignificant influence. The conclusion indicates that while pricing models theoretically shape profitability, their practical impact is limited by regulatory rigidity, risk mispricing, and macroeconomic instability. It is recommended that banks adopt flexible, data driven pricing systems, strengthen credit risk evaluation, and enhance regulatory collaboration. Policymakers should encourage digital innovation and balanced oversight. Future studies should expand coverage to lower tier banks, include macroeconomic variables, and apply longitudinal or mixed method designs to better capture the evolving relationship between pricing strategies and bank performance.