ABSTRACT

This research project aimed at investigating the monetary policy and performance of commercial banks in Kenya. Commercial Banks have on average been posting a continuous decline in their performance over the last decade. The return on asset in 2014 was 4.46% declined to 3.4% in 2015 and 3.1% in 2016 while the return on equity has also been declining from 28.2% in 2014 to 23.8%in 2015 and 20.6% in 2016 forming the basis of the study. The central bank of Kenya is tasked with responsibilities to ensuring, among them price stability, economic growth, attainment of and assurance of sound banking system in the economy and it uses commercial banks as transmission mechanism through monetary policy formulation and implementation. It was carried out with the following objectives; to establish the effect of interest rate, reserve requirement, open market operation and discount window operation and performance. The study conducted was a census of all commercial banks in Kenya from the year 2011 to 2015. This study utilized both primary and secondary data. Primary data were gathered by administering questionnaire on a drop and pick basis while secondary data were collected from the country’s central bank annual reports depository and specific commercial banks audited financial statements. Data editing and coding were done to detect anomalies and omissions. Data collected were analysed using multiple regression model and data presentation using graphs and tables. The statistical package for social sciences (SPSS) version 16 was used to analyse data. Correlation research design also adopted to explain the existing relationship between the variables. The study found out that monetary policy controls 72.2% of performance of commercial banks in Kenya. If all the variables were taken constant at zero the performance of commercial banks would be 10.365, a unit increase in central bank rate would lead to a 0.025 increase in performance commercial bank; a unit increase in cash reserve ratio would lead to a 1.053 times decrease in performance of commercial bank, a unit increase in open market operation would lead to a 0.057 increase the performance of commercial in banks and a unit increase in discount window operation would lead to 0.61 decrease in the performance of commercial banks. This study concluded cash reserve ratio had the biggest effect on the performance of commercial banks succeeded by open market operation.