Monetary policy and financial performance of Commercial Banks in Kenya
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Date
2018
Authors
Kimani, Gladys Mugure
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Commercial banks play a vital role in the allocation of capital resources and risk sharing of
future flows in any given economy or country. An efficient and effective banking industry in any
economy facilitates business cycles which bring about increased growth and welfare in that
country. Therefore, the financial performance of commercial banks is of great importance to a
nation. However, the profitability of commercial banks is affected by the changes in monetary
policy. Monetary policy has a direct impact on the banking sector. The financial performance of
commercial banks in Kenya has been on the decline and this has raised concerns in all corners of
the financial sector. Between the period 2012 and 2016, the profitability of commercial banks in
Kenya has been characterized by a decreasing trend. This has caused some banks to cut down
their work force in order to cover for the operating costs which they incur. A number of studies
have been conducted on monetary policy and financial performances of commercial banks in
developed countries. Similarly, a few studies have been carried out on monetary policy and
financial performances of commercial banks in Kenya. However, these studies did not consider
moderating characteristics and their impacts on the relationship between monetary policy and
financial performance of commercial banks. This study sought to address this gap in literature as
it focused on the influence of monetary policy on financial performance of commercial banks in
Kenya, thus making it the general objective of the study. Consequently, the specific objectives of
the study are to determine the influence of Central Bank Base Rate, money supply and inflation
on financial performance of Commercial Banks in Kenya. Lastly, to determine the moderating
influence of bank size on the relationship between monetary policy and financial performance of
Commercial Banks in Kenya. The study made use of annual panel data on the 43 Commercial
Banks in Kenya for the period 2012 to 2016. Causal research design was adopted where a census
sampling design was used. The study made use of panel data which was analysed within the
framework of a panel regression model. Similarly, the study conducted diagnostic test for
stationarity, normality, correlation and hausman tests. The findings of the study show that
Central Bank Base Rate has a negative and insignificant effect of financial performance of
commercial banks in Kenya. Secondly, the findings of the study indicated a positive and
significant effect on money supply on financial performance of commercial banks. Thirdly, the
findings of the study provide evidence of a negative and significant effect of CRR on financial
performance of commercial banks. Furthermore, the findings of the study show that inflation has
a negative and insignificant effect on commercial banks in Kenya. Lastly, the findings of the
study indicated a significant moderating effect of bank size on the relationship between monetary
policy and financial performance of commercial banks in Kenya. Therefore, the study
recommends that the Central Bank of Kenya should study and incorporate the ever changing
operating environment of commercial banks when making changes or adjustments in the money
supply. In addition, the Central Bank of Kenya should be cautious when changing the cash
reserve ratio especially when increasing the Cash Reserve Ratio as it increase leads to a decrease
in the amount of cash available for commercial banks. Furthermore, the management of
commercial banks should embark on activities that will lead to high assets volume. These
activities include lower interest rate to attract borrowers and better customer relationship to
retain customers.
Description
A research project submitted to the school of business in partial fulfillment of the requirement for the award of the degree of master of business administration (finance option) of Kenyatta University July, 2018