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. However, 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 Monetary policy has a direct impact on the banking sector. The link between monetary policy and bank financial performance has gained prominence following the Great Financial Crisis. 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. This study sought to examine the effect of monetary policy on financial performance of commercial banks in Kenya. The study made use of annual panel data while focusing on Commercial Banks in Kenya for the period 2012 to 2016. Causal research design was adopted where the study made use of panel data which was analysed within the framework of a panel regression model. 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 Cash Reserve Ratio 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.
Keywords: Monetary Policy, Central Bank Base Rate, Cash Reserve Ratio, Money Supply, Bank Size, Inflation, Financial Performance and Commercial Banks.
Title: MONETARY POLICY AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA
Author: Gladys Mugure Kimani, Dr. Jeremiah Koori
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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