Monetary Policy Instruments And Financial Performance Of Commercial Banks In Kenya

ABSTRACT

The commercial banks in Kenya have witnessed a general decline in their profitability over the years occasioned by the global financial crisis of 2008 which ravaged the banking sector. Financial performance of Kenyan banks has since declined from 4.43% in 2010 to 2.8% in 2018. Consequently, some banks were put under receivership a few years after the crisis while others navigated through the difficult times, albeit with declining profitability. The Central Bank of Kenya responded with a myriad of monetary policy interventions to protect the banking industry from such a crisis. The main objective of this study was, therefore to investigate the influence of these monetary policy instruments and the mediating effect of capital adequacy ratio on the relationship between monetary policy instruments and financial performance of commercial banks in Kenya. The specific objectives of the study were: To examine the effect of open market operations, cash reserve, and central bank rate on the performance of commercial banks; and to establish the mediating effect of capital adequacy ratio on the relationship between monetary policy instruments and financial performance of commercial banks in Kenya. The theoretical framework of the study was guided by the Loan pricing theory of money, the neo-classical theory of interest, efficiency theory, and financial intermediation theory. The study was anchored on the positivism philosophical orientation. Both the descriptive and the explanatory research designs were used for the study. Secondary data obtained from archival data of the Central Bank of Kenya and specific data from the various banks under study were used. Data was then edited, presented, and analysed using Microsoft Excel spread sheets, and STATA. The study was a census of all the 42 commercial banks licensed and supervised by the Central Bank of Kenya. Data analysis was done using descriptive and inferential statistical techniques such as mean, standard deviation, correlation, coefficient of determinant, and tables. The analysis showed that 58.4% of the variability of financial performance was accounted for in the model. The p-value for the overall model was 0.000, which is significant at 5% level of significance, implying that monetary policy has a significant influence on commercial banks' performance. The correlation analysis showed a very weak negative correlation between OMO and ROA, a strong negative correlation between CRR and ROA, a very weak positive correlation between CBR and ROA and a very strong positive correlation between capital adequacy ratio and ROA. The study concluded that open market operations, cash reserve, and central bank rate have a statistically significant influence on the performance of commercial banks. The analysis also showed that the capital adequacy ratio partially mediates the relationship between monetary policy and financial performance of commercial banks. The study recommends that the regulator make OMO more appealing to commercial banks, increase the volume of trade in the open market, and keep CRR and CBR at manageable levels to enhance banks' profitability. Capital requirements need to be reviewed regularly to keep banks liquid. This study recommends to scholars to investigate the influence of monetary policy on the profitability of both commercial banks and non-bank financial institutions. The effects of fiscal policy on the performance of commercial banks also need to be studied.

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APA

FREDRICK, A (2021). Monetary Policy Instruments And Financial Performance Of Commercial Banks In Kenya. Afribary. Retrieved from https://afribary.com/works/monetary-policy-instruments-and-financial-performance-of-commercial-banks-in-kenya

MLA 8th

FREDRICK, ABONYO "Monetary Policy Instruments And Financial Performance Of Commercial Banks In Kenya" Afribary. Afribary, 28 May. 2021, https://afribary.com/works/monetary-policy-instruments-and-financial-performance-of-commercial-banks-in-kenya. Accessed 30 May. 2024.

MLA7

FREDRICK, ABONYO . "Monetary Policy Instruments And Financial Performance Of Commercial Banks In Kenya". Afribary, Afribary, 28 May. 2021. Web. 30 May. 2024. < https://afribary.com/works/monetary-policy-instruments-and-financial-performance-of-commercial-banks-in-kenya >.

Chicago

FREDRICK, ABONYO . "Monetary Policy Instruments And Financial Performance Of Commercial Banks In Kenya" Afribary (2021). Accessed May 30, 2024. https://afribary.com/works/monetary-policy-instruments-and-financial-performance-of-commercial-banks-in-kenya