THE MODERATING EFFECT OF ZERO-SUM GAME THEORY ON INTEREST RATES AND COMMERCIAL BANKS PROFITABILITY

Abstract

Zero sum is a situation in game theory in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero. There are two types of interest rates charged by banks; one is on borrowers loans and the other is on customers savings. It is expected that the two interest rates should be treated equally since both are benefits to the receivers and in conformity with the zero sum theory. However, this seemed not to have been the case. This notwithstanding, Research has shown that borrowing interest charged by commercial banks have skyrocketed interest received from customers savings. This is a clear indication that the commercial banks businesses operations contradict sharply with the zero sum game. This is, based on the fact that it costs bank borrowers as much as it benefits bank lenders. One specific objective of the study was derived from the general objective. A conceptual framework was used to explain the key factors, concepts and/or variables studied that indicated the interactive relationships amongst them. The Theories used included economic theory and zero sum game theory. The total population of the study comprised of bank managers from Commercial banks and Commercial bank borrowers within Nairobi Central Business District. The sample comprised of selected Commercial banks and bank borrowers within Nairobi’s Central Business District. The study adopted a descriptive cross-sectional design with a mixture of purposive and simple random sampling techniques. A researcher designed questionnaire was used to collect data from sampled respondents. Regression analysis was used to test the hypotheses. The two null hypotheses developed were tested and both were rejected at 5% level of confidence. Findings revealed a significant relationship between interest rates and Commercial banks profitability and a significant moderating effect of zero sum game on the relationship between interest rates and commercial banks profitability. The study recommended that to attain a point of equilibrium, Commercial banks should rate the two interest rates equally so that customers gain should be banks loss and vice versa to be in conformity with the zero sum game theory. This would go along encouraging customers to take more loans and also increase their savings. The multiplier effect would be increased savings and loaning and hence increase in Commercial banks profitability. The study’s contribution to knowledge is that banks should strictly adhere to zero sum game theory for continued profitability.