The Effect of Monetary Policy Tools on Performance of Listed Banking Sector at the Nairobi Securities Exchange.

Abstract

Effective monetary policy should promote return on investment and positive trend of share prices among listed companies. This calls for in-depth understanding of how monetary policies impact financial markets, which would in turn impact financial asset prices and patterns. Hence, main objective of this research in evaluating effect of monetary policy tools on share performance with focus on banks listed in Nairobi securities exchange. This study was based on international Fisher effect, interest rate parity and arbitrage portfolio theory. The reseach relied on time series data. Time series analysis was applied to analyse the data. KNBS and CBK annual reports were the sources of secondary data for this study. Monthly data was adopted. Stationarity tests were carried out and vector autoregressive model was fitted. Descriptive statistics and time series analysis analyzed the data. There was positive effect of central bank lending rate and money supply on share performance. Cash reserve ratio and open market operations has a negative effect share performance. Open market operations have positive effects on share performance. The study concludes, that the rate at which central bank lends, leads to a positive result on share performance, especially of those banks listed in Kenya. On the flipside, an increase in cash reserve ratio, negatively impacted on the share execution for the same banks. Whereas, an increase in open market operations increases share performance of listed banks. The country would also experience negative impact if money supply decreased. It can be recommended that there is need for policy makers to evaluate the extent of co-movement between monetary policy tools and share performance of listed banks so as to develop policies that would aid in achievement of the roles of the banking sector