Effect of Monetary Policy on Credit Supply in Kenya

Abstract

Governments use economic management tools such as monetary policy to shape the performance of the economy. Such tools include CRR, OMO and CBR. These are instruments of monetary policy that are implemented through the central banks. The objective of the research was to establish the effect of monetary policy on credit supply in Kenya. This study adopted a descriptive research design. Descriptive statistics such as mean, median, minimum, maximum and standard deviation were used to describe the trend of the variables. Breusch Godfrey serial correlation LM test was used to test correlation of the study variables. Stationarity tests on time series data was conducted using augmented dickey fuller test statistic. Regression analysis was used to establish the influence of monetary policy on credit supply. In this research secondary data for each variable was used. Credit Supply was measured in terms of the gross loans advanced by commercial banks while CBR, CRR, OMO and Inflation were used as instruments of monetary policy. Quarterly data was collected for a period of eleven years (2005 to 2015). The data was analyzed using Eviews data analysis software and Microsoft excel (version 2003) The study concluded that CRR, OMO and Inflation are significant and have a negative effect on credit supply. The model was also fit to explain the relationship as 76% (R2= 0.761160) variation of the dependent variable (Credit supply) was explained by the independent variables (OMO, CRR, CBR and Inflation) in the long run. Adjusted R- square which provides adjustment to the R Square was73% (Adjusted R2= 0.736664) indicating 73% variation in credit supply was explained by independent variables (OMO, CRR, CBR and Inflation). F- Statistic 31.07233 was significant at 1% level P=0.0000. The study recommends that the Central Bank of Kenya should come up with monitoring and evaluation programmes of monitoring how credit supply is influenced by various monetary policy instruments and should streamline the economic environment in which banks operate by ensuring CRR, OMO and Inflation are maintained at a constant. The study narrowed in scope to commercial banks and excluded the non-banking organizations. Additionally a study should be done on the impact of monetary policy on money supply to capture both banking and non-banking institutions. The research had a presumption that the relationship of the variables was linear therefore more studies should be carried out explore nonlinear relationship on the variables of study, additionally a further study that focus on the influence of both fiscal and monetary policies on credit supply should be carried out.