Effect of Monetary Policy Instruments on Efficiency of Commercial Banks in Kenya

Abstract

Monetary policy instruments refer to measures put in place to control the supply of money in any economy. Commercial banks are usually considered around the globe as the most appropriate channels of implementing monetary policy by most central banks. The Central Bank of Kenya is charged with the responsibility of ensuring that sound monetary measures are in place. There is a very high degree of interdependence between monetary policy implementation and the financial efficiency commercial banks in an economy. In order to carry out this regulation effectively, government employs monetary policies as the primary tool to regulate the banking sector. The main target variables for monetary policy instruments are inflation and output. The actions from effects of monetary policy affects the general levels of efficiency of banks prevailing in the Country. The most complex issue facing central banks across the globe is identifying the appropriate level and firm of intervention in the banking sector through monetary policies. Locally, studies have focused on internal bank factors, interest rates, profitability but none has addressed the effect of monetary policy instruments on efficiency of commercial banks in Kenya. This study therefore seeks fill this gap by answering the query; what is the effect of Central Bank monetary policy instruments on efficiency of commercial banks in Kenya?The research study will base its arguments on the Keynesian theory, Quantity Theory of Money, Modern Monetary theory and loanable funds theory. The study used descriptive research design. The population of the study encompassed 42 commercial banks as at 31st December 2015. The research obtained absolute secondary data which was gathered from both annual reports and financial statements of the banks at the CBK and also from the Kenya National Bureau of Statistics (KNBS) for the period January 2011 to December 2015. The study focused on 91-day Treasury bill rate, foreign exchange rate, Central Bank cash reserve ratio and Central Bank Rate (REPO rate) as the independent variables. The dependent variable which is bank efficiency is measured using the DEA model.The study found out that 91-day Treasury bill rate, foreign exchange rate, Central Bank cash reserve ratio and Central Bank Rate (REPO rate) had a positive effect on bank efficiency. The conclusion is that central bank monetary policy instruments had a positive and significant impact on efficiency of Kenya’s commercial banks for the period of this study. The study also recommends that local researchers and academicians should increasingly study the central bank monetary policy instruments to add on to the limited literature in the area. This will ensure that there will be adequate local literature that can be used to relate to local situation. The study further recommends that there should be a policy set to standardize the presentation of financial statements commercial banks in Kenya. Further studies can also use primary data to collect data from the commercial financial institutions in Kenya.