The Influence of Interest Rate Risk and Supporting Variables Gap and Option Risk on Financial Performance: A Study of the Commercial Banks in Belize

This study explores the influence of interest rate risk and its supporting variables, option and gap risk, on the closure of commercial banks in Belize. Using a mixed methods approach, the researcher conducted a qualitative interview discussion among twenty employees and customers of the commercial banks to determine their views on the reason for the closure of commercial banks in Belize. Moreover, the quantitative aspect involved a review of the financial statements of all commercial banks in Belize and utilizing the NIM, Gap Analysis, and Options Risk formula to determine the impact of interest rate risk on the closure of the commercial banks in Belize. This was done over a ten-year period from 2011 to 2020. NVivo and XLMiner Analysis ToolPak were used to generate Anova Single- Factor Tables and Data Analysis. Integrating these methods enabled a more refined interpretation of both the measurable outcomes and the underlying factors impacting the failure of commercial banks in Belize. The chief problem is that thirty-three percent of commercial banks closed within ten years. The underpinning theoretical framework is the organizational life cycle, as it yields a holistic view of the firm. This study also focuses on the Liquidity and Loan Theories. There are three research questions: First, does commercial loans’ interest rate risk determine the deficiency of commercial banks in Belize? Two, how does the improper management of interest rate and its supporting variables contribute to the breakdown of merchant banks in Belize? And question three, how do interest rate supporting variables contribute to the collapse of finance houses in Belize? Based on the findings, it has been concluded that the IRR is a contributing factor to commercial banks’ closure in Belize; however, based on the qualitative interview discussions, other reasons for the bank closure are due to strict government regulations, operational efficiency, and market share. This study is beneficial as there is no known research or analysis in this area as determined by the researcher; therefore, the study is useful in understanding and improving Belize’s development. The accurate and careful execution of the study can assist the government in making informed decisions for the nation. The study can be replicated in similar countries in the Caribbean and the world.