Monetary Policy And Financial Performance Of Commercial Banks In Kenya

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.