Monetary Policy And Performance Ofselected Commercial Banks In Kenya

ABSTRACT

The purpose of this study was to investigate the monetary policy and performance of

commercial banks in Kenya. Commercial Banks have on average been posting a

continuous decline in their performance over the last decade. The study was guided

by the following objectives; to establish the effect of interest rate and performance of

commercial banks, to establish the effect of cash reserve ratio and performance of

commercial banks, to establish the effect of open market operation and performance

of commercial banks and to establish the effect of discount window operation and

performance of commercial banks in Kenya. The study targeted all commercial

banks in Kenya from which simple random sampling was used to obtain a sample.

Sampling frame being the central bank’s list of licensed commercial banks in Kenya

before the year 2011. This study used both primary and secondary data. Primary data

were obtained by administering questionnaire on a drop and pick basis while

secondary data were obtained from central bank of Kenya annual reports and specific

commercial banks audited financial statements. Data collected were analysed using

multiple regression model and data presentation using graphs and tables to establish

the relationship between monetary policy and performance of commercial banks.

Correlation research design was also adopted to explain the existing relationship

between monetary policy and performance of commercial banks in Kenya. The study

found out that monetary policy controls 72.2% of performance of commercial banks

in Kenya. Taking all other independent variables at zero the performance of

commercial banks was 10.365, a unit increase in central bank rate will lead to a

0.025 increase in performance commercial bank; a unit increase in cash reserve ratio

will lead to a 1.053 times decrease in performance of commercial bank, a unit

increase in open market operation led to a 0.057 increase the performance of

commercial in banks and a unit increase in discount window operation will lead to

0.61 decrease in the performance of commercial banks. This concluded cash reserve

ratio has the greatest effect on the performance of commercial banks followed by

open market operation. At 5% level of significance and 95% level of confidence, all

the independent variables were significant in determining performance of

commercial banks in Kenya. The study recommended that central bank of Kenya

should consider raising the central banks rate since it was found to be the only

variable from monetary policy that is improving commercial banks profitability.

Cash reserve ratio has been negating the performance of commercial banks in Kenya,

central bank of Kenya should select a low and suitable rate the commercial banks are

required to maintain in the cash tills.