| dc.description.abstract | Money supply and demand, monetary policy, inflation, credit risk, liquidity risk, and economic growth are some of the variables that influence interest rates. Over the past ten years, interest rate volatility has been the primary driver of significant change in Kenya's banking system. Objective of the study was to assess the effect of interest rate drivers on financial performance of commercial banks in Kenya. The study focused four variables which included: liquidity risk, credit risk, inflation rate and monetary policy. The theories reviewed are based on the key variables and they included the pecking order theory, credit migration theory, monetary theory and rational expectations theory. This study used a descriptive research approach. The participants were expected to include 47 upper-level managers, 128 mid-level managers, and 303 lower-level employees from the Commercial Banks' headquarters in Nairobi. This research made use of a stratified sampling method. A basic data set was utilized in the research. A pilot group of 22 individuals was used to test the reliability and validity of the study methods. Descriptive statistics was used to evaluate the quantitative data. This study made use of SPSS version 28, a statistical program designed for use in the social sciences. The mathematical model that revealed the correlations between the variables was found by means of multiple linear regression analysis. In summary, the study established that liquidity risk, credit risk, inflation rate and monetary policy were found to be satisfactory in explaining financial performance of commercial banks in Kenya. In addition, correlation analysis revealed that liquidity risk, credit risk, inflation rate and monetary policy were positively and significantly associated to financial performance. The following managerial recommendations were made; enhance liquidity management, strengthen credit risk management, adapt to inflation trends, align with monetary policy. Policy recommendations included the following: strengthen regulatory frameworks for liquidity, improve credit risk regulations, adaptive inflation management policies and monetary policy coordination.
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