Effect of Changes in Monetary Policy on Financial Performance of Commercial Banks: A Case of Selected Commercial Banks in Kenya

Abstract

Monetary policy changes impact on the financial performance of commercial banks as it plays an important role in growth and stability of financial markets by regulating interest rates and money supply. Despite the various studies conducted on monetary policy there remained limited empirical literature on determination of effect of monetary policy on the financial performance of commercial banks which the study sought to investigate. The objectives of the study were investigating the effect of changes in monetary policy on financial performance of commercial banks in Kenya; determining the effect of changes in the Central Bank rate on the financial performance of commercial banks in Kenya; finding out the effect of reserve ratio requirement on financial performance of commercial banks in Kenya, and determining the effect of repo rate on financial performance of commercial banks in Kenya.The study considered a five-year frame from the year 2010 to 2014. The independent variables of the study comprised the Central Bank rate; cash reserve ratio and the repo rate whereas the dependent variable was the return on equity. The study employed descriptive longitudinal design whereby total population comprised forty two commercial banks licensed by the Central Bank of Kenya as at December 2014. The research tests the study employed were; quantile-quantile plot, Durbin-Watson and normality tests in conducting the analysis. Findings from the study showed that a negative relationship was observed between cash reserve ratio requirement and commercial banks financial performance while a positive relationship was showed to exist between the repo rate and the financial performance of banks. The study recommended that the Central Bank needed to lower the Central Bank rate in order to stimulate economic growth.