Effect of Monetary Policy on Financial Performance of Domestic and Foreign Commercial Banks in Rwanda
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Date
2024-11
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Kenyatta University
Abstract
A nation's monetary policy helps it achieve its varied economic objectives. All monetary decisions in Rwanda are made by the National Bank of Rwanda (BNR), which is the country's monetary authority. The bank works to stabilize prices and reduce inflation in order to foster an effective economic environment. This contributes to the nation's economic expansion. The bank employs a variety of tools to achieve its financial goals. The financial industry is essential to the expansion of the economy. It is made up of microfinance organizations, development banks, and commercial banks in Rwanda. The Monetary Authority regulates commercial banks. For example, the BNR establishes the reserve requirement for commercial banks. This helps the economy manage the money supply, which will affect the commercial banks' financial performance. The monetary authority has implemented a number of measures, but some commercial banks have demonstrated uneven outcomes. For example, Commercial Bank of Africa (Rwanda) lost money in 2017 and 2018, but Ecobank Rwanda made money in 2018. The objective was to assess the profitability of Rwanda's domestic and foreign commercial banks and ascertain the impact of monetary policy on their financial performance. The specific objectives were to determine how the money supply and discount rate impacted the financial performance of Rwanda's commercial banks and to compare the profitability of domestic and foreign commercial banks operating in Rwanda in response to monetary policy. The market power theory was used to create the pertinent empirical model. A non-experimental panel research design was used in the study and panel secondary data from 2012 to 2018 was utilized. The necessary diagnostic procedures, including stationarity and cointegration tests, were carried out. Hausman test was run too test if random effect or fixed effect models should be estimated for the first and second objectives and random affects model was selected. For the third objective, the study estimated a binary logit model to estimate the profitability of foreign versus local commercial bank. The study findings showed that local banks were performing better than the foreign banks as revealed by a higher Return on Assets in local banks when compared to foreign banks. However, for money supply and discount rate both foreign and domestic banks performed the same. Market share, the liquid to deposit ratio, the liquidity ratio, the required reserve ratio, the money supply, GDP, and inflation were all found to be positively and significantly correlated with return on assets (ROA); in contrast, the discount rate and credit growth showed a negative correlation. Conversely, the cointegration test demonstrated the existence of cointegration and the existence of a long-term link between the variables. To ascertain the link between the independent and dependent variables, the Random Effects Regression was selected.. In the regression analysis, it was discovered that the money supply and discount rate coefficients were statistically significant but negative. In respect to monetary policy, the binary logistic regression revealed a decreased likelihood that the profitability of international banks would exceed that of domestic banks. The study recommended that monetary policy makers should create measures that will decrease the quantity of money in circulation. The study recommended that banks should exercise due diligence when estimating the future cash flows of the investments they make today for their investors. The findings also suggested that foreign bank management examine monetary policies, including those pertaining to the money supply and discount rate, and develop methods and policies that will improve their performance.
Description
A Research Project Submitted to the Department of Econometrics and Statistics, School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of The Degree of Master of Economics (Econometrics And Statistics) of Kenyatta University, November 2024.
Supervisor
Aflonia Mbuthia