Monetary Policy Instruments and Financial Performance of the Banking Industry in Kenya

Edna Mbithe Muia; Tumaini Mutugi Mwikamba

doi:10.61108/ijsshr.v2i3.140

Monetary Policy Instruments and Financial Performance of the Banking Industry in Kenya

Authors

Edna Mbithe Muia Scholar, Jomo Kenyatta University of Agriculture and Technology, Kenya
Tumaini Mutugi Mwikamba Senior Lecturer: Jomo Kenyatta University of Agriculture and Technology

DOI:

https://doi.org/10.61108/ijsshr.v2i3.140

Keywords:

Monetary Policy Instruments, Financial Performance

Abstract

The Kenyan banking sector has faced significant volatility in recent years, notably marked by a decline in Return on Assets (ROA). This decrease reflects the sector's struggles with rising inflation, currency depreciation, and increased non-performing loans. Economic uncertainties and tighter global monetary policies have compounded these challenges, resulting in a more unstable financial environment. This volatility underscores the sector's sensitivity to both domestic and international economic conditions. In response, this research aimed to investigate the effect of monetary policy instruments on the financial performance of banks in Kenya. The study sought to analyze the effect of lending rates, money supply, open market operations (OMO), and the Central Bank Rate (CBR) on banks' financial performance. Anchored on four relevant theories—the Loanable Funds Theory, Quantity Theory of Money, Keynesian Economics, and Zero Bound Theory. The research utilized a causal design and a multiple linear regression model. Covering all 42 banks operating in Kenya from January 2009 to December 2023, the study employed secondary data. The correlation analysis reveals significant relationships between the monetary policy instruments and the financial performance of commercial banks in Kenya. Lending rates demonstrate a positive relationship with financial performance, suggesting that higher rates may benefit banks’ profitability. In contrast, both money supply and central bank rate show negative associations with financial performance, implying that increases in these variables might hinder profitability. Additionally, the analysis indicates a positive link between open market operations and bank performance, highlighting the varied effects of these monetary instruments on the banks' financial outcomes. Collectively, these insights underscore the interconnectedness of these monetary policy instruments and their impact on the financial performance of banks in Kenya. Given the complex interplay of these factors, policymakers should adopt a holistic view, regularly reviewing and adjusting policies to maintain economic stability while supporting a robust banking sector.

Downloads

Download data is not yet available.

References

. Abutabenjeh, S., & Jaradat, R. (2018). Clarification of research design, research methods, and research methodology: A guide for public administration researchers and practitioners. Teaching Public Administration, 36(3), 237-258.

. Shirya, A. I., Njoka, C., & Abdul, F. (2023). Relationship between Monetary Policy Instruments and Financial Performance of Commercial Banks in Nigeria. Open Journal of Business and Management, 11(3), 945-962.

. Asaleye, A. J., Rotdelmwa, F., Lawal, A. I., Inegbedion, H., & Popoola, O. (2021). Monetary policy channels and agricultural performance: evidence from Nigeria. Asian Economic and Financial Review, 11(3), 205-218.

. Bibow, J. (2001). The loanable funds fallacy: exercises in the analysis of disequilibrium. Cambridge Journal of Economics, 25(5), 591-616.

. Blanchard, O. (2017). Macroeconomics (7th ed.). Pearson.

. Blanchard, O. J., Cherrier, B., Clerc, P., Laidler, D. E., Orphanides, A., & Trautwein, H. M. (2022). Monetary non-neutrality and stabilisation policies 50 years after Lucas’s “expectations” paper: a roundtable discussion. The European Journal of the History of Economic Thought, 29(6), 1165-1189.

. Business Daily (2023). Banks profit dips 4.9pc in rare decline for industry. Published on 5th December 2023. Retrieved from https://www.businessdailyafrica.com/bd/markets/capital-markets/banks-profit-dips-4-9pc-in-rare-decline-for-industry--4453872

. Central Bank of Kenya (2023). 2023 Annual report. Retrieved from https://www.centralbank.go.ke/uploads/cbk_annual_reports/1424452432_2023%20Annu al%20Report.pdf

. Central Bank of Kenya (2023). 30th Monetary Policy Committee report, April 2023. Retrieved from https www.centralbank.go.ke/uploads/monetary_policy_reports/548968133_30th%20Monetary%20Policy%20Committee%20Report, %20April%202023.pdf

. Central Bank of Kenya. (2022). Bank Supervision Annual Report 2021.https://www.centralbank.go.ke/bank-supervision/

. Central Bank of Kenya. (2021). Bank Supervision Annual Report 2020. https://www.centralbank.go.ke/bank-supervision/

. Central Bank of Kenya (2023). Kenya Financial Sector Stability Report 2022. Retrieved from https://www.centralbank.go.ke/uploads/financial_sector_stability/138465995_Kenya%20Financial %20Sector%20Stability%20Report%202022.pdf

. Central Bank of Kenya (2022). 2022 Annual report. Retrieved from https://www.centralbank.go.ke/uploads/cbk_annual_reports/319054182_2022%20Annual%20Report.pdf

. Central Bank of Kenya. (2020). Monetary Policy Statement, June 2020. https://www.centralbank.go.ke/monetary-policy/

. Cheruiyot, J. (2012). Effectiveness of Monetary Policy Tools in Countering Inflation in Kenya. Master of Business Administration project. University of Nairobi, School of Business.

. Claudio Borio, Leonardo Gambacorta and Boris Hofmann (2015). The influence of monetary policy on bank profitability. BIS Working Papers No 514. Monetary and Economic Department.

. Hassan, J.S., & Oyedele, O. (2022). Monetary policy and the financial performance of quoted deposit money banks in Nigeria. KIU Interdisciplinary Journal of Humanities and Social Sciences, 3(2), 195-222

. Kimani Gladys Mugure (2018). Monetary policy and financial performance of commercial banks in Kenya. Unpublished research project Master of Business Administration (Finance Option). Kenyatta University.

. Kimani J. (2013). Assessment of effect of monetary policies on lending behavior of Commercial Banks in Kenya. Unpublished research project. Kenyatta University, School of Business.

. Lohr, S.L. (2021). Sampling: Design and Analysis (3rd ed.). Chapman and Hall/CRC.

. Macharia, E. (2013). The effects of global financial crisis on the financial performance of commercial banks offering mortgage finance in Kenya. International journal of economics and finance, Vol.1, Issue 2, 2013

. Meshak, K. M & Nyamute, W (2016). The Effect of Monetary Policy on Financial Performance of the Commercial Banks Listed on the Nairobi Securities Exchange. International Journal of Finance and Accounting ISSN 2520 -0445(Online) Vol.1, Issue 1 No.7, pp 74 - 87, 2016.

. Mulwa, G. K (2015). The Effect of Monetary Policy on the Financial Performance of Commercial Banks in Kenya. Unpublished Master of Science in Finance. University of Nairobi, School of Business.

. Otwoko, B. E., Maina, K. E., & Kwasira, J. (2023). Influence of Monetary Policy on Financial Performance of DT SACCOs in Kenya. African Journal of Emerging Issues (AJOEI), 3(1), 118-128.

. Skidelsky, R. (2010). Keynes: The Return of the Master. Public Affairs.

Vol. 2 No. 3 (2024) of the International Journal of Social Science and Humanities Research (IJSSHR)

Downloads

pdf.

Published

2024-10-31

How to Cite

Muia, E. M., & Mwikamba, T. M. (2024). Monetary Policy Instruments and Financial Performance of the Banking Industry in Kenya. International Journal of Social Science and Humanities Research (IJSSHR) ISSN 2959-7056 (o); 2959-7048 (p), 2(3), 263–279. https://doi.org/10.61108/ijsshr.v2i3.140

Download Citation

Issue

Vol. 2 No. 3 (2024): International Journal of Social Science and Humanities Research (IJSSHR) ISSN 2959-7056 (o); 2959-7048 (p)

Section

Articles

License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

The International Journal of Social Science and Humanities Research (IJSSHR) adopts the Creative Commons Attribution-NonCommercial 4.0 International (CC BY-NC 4.0) license terms for all published articles. This license governs the rights and permissions associated with the use, distribution, and reproduction of the published content, ensuring a balance between authors' intellectual property rights and the wider dissemination of knowledge.

Under the CC BY-NC 4.0 license, the following terms apply:

Attribution (BY): Users are required to give appropriate credit to the original authors and provide a link to the original work. Proper attribution acknowledges the intellectual contribution of the authors and allows others to trace the research back to its source.
NonCommercial (NC): The license prohibits commercial use of the published material. Users may not exploit the work for commercial purposes without obtaining explicit permission from the copyright holder. Non-commercial use includes activities such as selling, licensing, or monetizing the content.
Adaptation: The CC BY-NC 4.0 license allows users to remix, transform, or build upon the original work, but only for non-commercial purposes. Adaptations or derivative works based on the published material must also be shared under the same license terms, giving proper attribution to the original authors.

The CC BY-NC 4.0 license ensures that the published research in the International Journal of Social Science and Humanities Research remains accessible to a wide audience while respecting the intellectual property rights of the authors. It encourages the sharing, dissemination, and collaborative use of knowledge within the academic community, fostering innovation and furthering the advancement of social sciences and humanities research.

Authors publishing their work in IJSSHR grant the journal the right to publish and distribute their articles under the CC BY-NC 4.0 license. This license facilitates the unrestricted availability of the research, allowing readers, educators, and researchers to access, cite, and build upon the published content, as long as they comply with the license terms.

By adopting the CC BY-NC 4.0 license, IJSSHR promotes open access principles and encourages the responsible use of scholarly work. It empowers researchers to disseminate their findings widely and fosters collaboration, ensuring that knowledge generated in the field of social sciences and humanities can have a broader societal impact.