MONETARY POLICY TRANSMISSION AND PROFITABILITY OF COMMERCIAL BANKS IN KENYA
Hawa Abdul Mohamed - Postgraduate Student, Department of Accounting and Finance, Kenyatta University, Kenya
Dr. Nathan Mwenda - Senior Lecturer, Department of Accounting and Finance, Kenyatta University, Kenya
ABSTRACT
In Kenya, profitability moved sharply over the past decade as monetary actions and regulatory reforms changed operating conditions. Return on assets fell from above 3% in 2014 to about 2% during the interest rate cap period of 2016 to 2019, with only modest recovery from 2020 to 2024. These patterns motivate an examination of the strength of monetary transmission in sustaining bank earnings. This overall goal of the research was to determine the effect of monetary policy transmission on the profitability of commercial banks in Kenya. The research’s specific goals were to determine the effect of the interest rate channel, credit channel, open market operations channel and liquidity channel on Profitability of Commercial Banks in Kenya. The theoretical framing draws on loanable funds theory, financial intermediation theory, liquidity preference theory and the profitability theory of financial intermediation. A census design was employed, covering all 38 commercial banks licensed by the Central Bank of Kenya as of December 2024. Data were drawn from audited financial statements, Central Bank of Kenya statistical bulletins, and annual supervision reports for the period 2014–2024. Profitability was proxied by ROA, while the transmission channels were measured respectively by the weighted average interbank rate, private sector credit growth, the 91-day Treasury bill rate, and broad money supply (M2). Panel regression techniques were applied after subjecting the dataset to diagnostic checks, which confirmed normality of residuals, absence of multicollinearity, and the robustness of model specification. The results showed that the interest rate channel exerted a significant negative effect on profitability, the credit channel had a significant positive effect, and the liquidity channel also had a positive and significant effect. In contrast, the open market operations channel was significant but negatively related to profitability, reflecting the tendency of banks to rely on government securities during periods of weak private lending. The study concludes that while credit expansion and liquidity growth improve earnings capacity, high interest rates and overdependence on Treasury instruments erode bank profitability. It recommends that banks strengthen asset–liability management, diversify income sources, and enhance credit risk frameworks, while policymakers, especially the Central Bank of Kenya, refine monetary instruments in ways that balance interest rate stability, credit expansion, liquidity growth, and securities reliance to reinforce profitability and resilience in the banking sector.